The move means the bank will no longer settle treasury and agency bonds through its US broker-dealer arm for those 30 clients, which are banks and brokers that use JP Morgan as a third party to settle trades on their behalf. The firm said it hoped the majority of clients would have a smooth transition and that it would complete its exit by the end of 2017.
JP Morgan’s decision affects only a few dozen clients, who will no longer be able to use the bank to settle trades through the Federal Reserve’s securities transfer system. But the move is a significant one because there are only a handful of large providers in the business, meaning those clients jettisoned are now under pressure to find alternatives.
Shifts in the plumbing underlying Wall Street’s trading in government securities are closely watched because they can help determine how freely financial institutions lend and borrow trillions of dollars from one another overnight.
“After careful review, we have determined that it [government securities settlement] is a non-core service, particularly as we simplify our business and continue to prioritise strategic growth opportunities,” said a spokesman for JP Morgan in a statement.
“We have built out custody, collateral management, prime brokerage and Treasury Services businesses into leading franchises, and in no way are those growing businesses affected by this decision,” he added.
The 30 clients have one thing in common: the banks and broker dealers lean heavily on the bank for daily liquidity and use the bank to kick-start settlement on their behalf.
JP Morgan has decided their business is no longer attractive as it looks to redeploy capital in higher-margin areas. Last year, the bank exited GlobeClear, a proprietary platform it used to enable clients to settle equities in multiple markets.
One of the businesses most caught up in JP Morgan’s exit is a type of bond-for-cash exchange called a repurchase agreement, or repo, between large banks. The portion of repos that will be most affected are called general collateral repos, or GCF repos, that are loans between banks secured by high-quality bonds. JP Morgan is responsible for about $ 40 billion of the roughly $ 275 billion in GCF repo trades outstanding.
One driver of the bank’s decision to exit, the people familiar said, was that the market for interbank GCF repos split in two on Monday, owing to a dispute over technology between JP Morgan, Depository Trust & Clearing Corp and Bank of New York Mellon.
Of the 30 clients JP Morgan is dropping, the list of affected primary dealers includes Royal Bank of Scotland, Credit Suisse and HSBC. RBS, Credit Suisse and HSBC will now likely have to approach BNY to become a client, which is the only other provider for that service, said people familiar with the matter.
A spokeswoman for BNY said, “We look forward to collaborating with market participants to help facilitate a smooth transition.” Spokespeople for RBS, Credit Suisse and HSBC either had no comment or didn’t immediately respond to a request for comment.
The Fed, which regulates the bank and has an interest in ensuring the smooth functioning of the repo market, can’t force private companies to enter or remain in the business.
The bank isn’t exiting its tri-party repo service, however, in which a third party – either JP Morgan or BNY – facilitates settlement of the trades for a fee.
At one point, JP Morgan considered selling securities settlements technology, but recently backed away from that idea, said people familiar with the matter.
A Treasury spokesman said it knew about JP Morgan’s plans and was coordinating with the Fed and JP Morgan to make sure there is minimal impact.
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This article was published by The Wall Street Journal