In less than 10 months, 350 mutual fund companies have signed on to the Fixed Income Clearing Corporation's (FICC) sponsor membership program, granting access $3.5 trillion worth of daily government securities trading.
"This shows how much the funds are eager to take advantage of the benefits of FICC membership. We anticipate that the number of sponsored members will climb, particularly as we ask more sponsors and buy-side firms recognize how useful the program is for their business," said Robert McGrail, president and chief executive of FICC.
Usually mutual funds and other buy-side companies cannot partake in FICC trade-netting services. However, the sponsorship program allows banks to partner with fund companies, thereby giving mutual funds access to a vast overnight market. FICC member banks with $5 billion in equity can sponsor funds.
For funds, sponsorship means increased liquidity, better risk management, and opportunities for financing.
Most importantly, this facilitates reverse repurchase agreements, which funds often enter into with banks to leverage their cash balances. FICC's AAA credit rating means funds don't have to pay a risk premium to participate, and can benefit from the New York-based corporation's automatic trade settlement guarantees.
For banks, the advantage is having the ability to record the net value of repo trades, rather than the gross value, freeing up the balance sheet for other deals with fund companies.
State Street Bank of Boston is the first, and to date, only sponsor bank.
"We've worked hard to educate our mutual fund customers on the advantages it offers to them," said Kerry Pope, senior vice president of State Street Bank.
FICC, a subsidiary of the Depository Trust and Clearance Corporation, hopes to expand the sponsor program to include pension and public funds, as well as insurance companies and pooled bank investments said DTCC Vice President David Cosgrove.