J.P. Morgan has launched Auto Substitution, new collateral management functionality that will enhance the operating model of the US 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 – the implementation of operational enhancements to achieve the practical elimination of intraday credit by the clearing banks. It also presents an opportunity to reduce the sizeable credit risks historically associated with the USD2trn tri-party repo market, while allowing dealers to retain access to securities required for intra-day trading.Auto Substitution minimises the use of cash as collateral and reduces unsecured depositor risk as investors are able to remain collateralised 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.
