FICC began processing U.S. government securities repurchase (repo) and reverse repo transactions between sponsoring banks and their sponsored mutual fund clients last October. Since then, according to FICC, a subsidiary of The Depository Trust & Clearing Corporation, the number of participants in its sponsored membership program has risen to 350-plus funds.

Under current regulations, mutual funds and other buy-side firms are normally precluded from membership in FICC and its trade netting services.
But they are able to take advantage of FICC's real-time trade matching, netting and guaranteed settlement by entering FICC's program under the sponsorship of a bank. Banks that are netting members of FICC and have a minimum equity of $5 billion are eligible to become sponsors.

Overnight investment opportunities
The program gives registered investment companies such as mutual funds access to a larger market for overnight investment, particularly the reverse repurchase agreements that mutual funds routinely execute with banks to earn income on their excess cash balances. Because FICC has a AAA credit rating, the funds can avoid paying a risk premium on their transactions, while gaining the efficiency, risk management and trade settlement guarantee that FICC's automated post-trade processing provides.

For banks that sponsor their mutual fund customers in the program, the chief advantage is the balance sheet relief that FICC's netting service provides.
Because FICC becomes the counterparty for all the buy-side trades, banks are able to record the net value rather than the gross value of repo trades on their balance sheets. This frees up balance sheet capacity for banks, enabling them to handle the growing needs of their mutual fund clients.
FICC's settlement guarantee also reduces counterparty credit risk for banks.

"What's especially heartening to us is that we have this many sponsored members coming to us through our first sponsor, State Street Bank," said Robert McGrail, FICC's chief executive officer and president. "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 add more sponsors and as more buy side firms recognize how useful the program is for their business."

Balance sheet offsets
State Street Bank, one of the world's largest custodial banks, worked with FICC to develop the sponsored membership concept and became the first formal sponsor in the program. "This is an exciting innovation that we're delighted to use, and we've worked hard to educate our mutual fund customers on the advantages it offers to them," said Kerry Pope, senior vice president, State Street Bank.

FICC is currently working on enhancing sponsored membership eligibility to include pension and public funds, and is researching the feasibility of adding insurance company and central bank pooled investments, noted David Cosgrove, DTCC vice president, Operations. "This will allow more institutional investors to take advantage of FICC's safe and automated low-cost processing while extending balance sheet relief to other market participants," he added.

FICC said it expected to have additional sponsoring banks - and more mutual funds - in the program before the end of this year.