JP Morgan has unveiled Auto Substitution, new 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.

According to JP Morgan, the 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 sizable 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.

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.

JP 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.

Kelly Mathieson, global business executive for clearance and collateral management business at JP Morgan, said: “Auto Substitution breaks new ground in reducing systemic risk for the US tri-party repo market. 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.”