J.P. Morgan to Exit Part of Its Government Securities Business -- Update
July 21 2016 - 7:49PM
Dow Jones News
By Katy Burne
Thirty clients of J.P. Morgan Chase & Co. are losing access
to the bank's government securities settlements business, the unit
that ensures that the quantities agreed to in trades are physically
exchanged, in the bank's latest re-evaluation of its most
capital-intensive businesses.
The move means the bank will no longer settle Treasury and
agency bonds through its U.S. broker-dealer arm for those 30
clients, which are banks and brokers that use J.P. 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.
J.P. 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 prioritize strategic growth
opportunities," said a spokesman for J.P. 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.
J.P. 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 J.P. 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. J.P. 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 J.P. Morgan,
Depository Trust & Clearing Corp. and Bank of New York Mellon
Corp.
Of the 30 clients J.P. Morgan is dropping, the list of affected
primary dealers includes Royal Bank of Scotland Group PLC, Credit
Suisse Group AG and HSBC Holdings PLC. 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 J.P. Morgan or BNY -- facilitates
settlement of the trades for a fee.
At one point, J.P. 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 J.P. Morgan's plans and
was coordinating with the Fed and J.P. Morgan to make sure there is
minimal impact.
Write to Katy Burne at katy.burne@wsj.com
(END) Dow Jones Newswires
July 21, 2016 19:34 ET (23:34 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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