J.P. Morgan today announced Auto Substitution, new functionality that will enhance the operating model of the U.S. Tri-Party Repo market in support of the recommendations issued recently by the Payments Risk Committee-sponsored Tri Party Repo Infrastructure Task Force. Auto Substitution addresses the primary component of Recommendation 1 of the Task Force - implement operational enhancements to achieve the practical elimination of intraday credit by the clearing banks. It also presents the opportunity to reduce the sizeable credit risks historically associated with the $2 trillion Tri-Party Repo market, while allowing dealers to retain access to securities required for intra-day trading.
J.P. Morgan's investment in Auto Substitution reflects its commitment to increasing the stability and reliability of Tri-Party Repos as an essential financing vehicle. Auto Substitution minimizes the use of cash as collateral and reduces unsecured depositor risk as investors are able to remain collateralized by eligible securities intra-day, as well as overnight. Through the substitution process, dealers and investors can maintain true term exposure to the counterparty with which they have contracted, reducing the need for the daily unwind without affecting market liquidity.
J.P. Morgan's patent-pending Auto Substitution functionality will allow the release of assets held in tri-party repo loans by substituting those assets with other eligible securities. To meet delivery instructions, Auto Substitution will employ continual scanning technology to search the loans for assets that meet the delivery criteria and will replace them with eligible securities or cash. Auto Substitution also reduces the investor's depositor risk to the clearing bank, while requiring little change to the current processes dealers use to execute securities trades.
"Auto Substitution breaks new ground in reducing systemic risk for the U.S. Tri-Party Repo market," states Kelly Mathieson, global business executive for J.P. Morgan's Clearance & Collateral Management business. "It represents a paradigm shift—the new options for both dealers and investors significantly enhance their ability to manage their collateral and mitigate risk more effectively." J.P. Morgan has successfully completed development and testing of Auto Substitution functionality.
Auto Substitution is the latest in a series of innovative new products and services being introduced as part of J.P. Morgan's Global Collateral Engine initiative, a multiyear strategic investment program to deliver fully global, enterprise-wide collateral management.
Collateral management is a vital risk management tool for institutions seeking to generate additional value from their portfolios while effectively managing their credit risk. A pioneer and market leader in global collateral management, J.P. Morgan was recently named the best tri-party service provider in Asia Pacific by The Asset Magazine. The 2010 Global Custodian Tri-Party Repo Survey distinguished J.P. Morgan from other providers, noting that "J.P. Morgan still has the broadest reach". In fact, J.P. Morgan was the only institution to qualify in all three regions and globally, gaining Commended ratings across the board.