A Safe and Effective Strategy to Boost Money Market Fund Performance
Fully Closed Repo (FCR) transactions allow Money Market Funds (MMFs) to unlock incremental yield on 100% of their existing U.S. Treasury holdings, without engaging in securities lending, introducing new risk factors, or compromising liquidity or safety.
Collateral substitution strategies such as FCR are not new to MMFs. FCR is not a product but rather a trade that needs no new approval if your MMF can buy and sell repurchase agreements. FCR is a modernized enhancement trade. It operates under standard Master Repurchase Agreement (MRA) documentation with a key differentiator: a custom “FCR Annex.” This Annex enables non-accounting event collateral substitutions—streamlining execution while preserving operational continuity and counterparty protection.
Key Benefits of Executing FCRs
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Credit Risk Eliminated – 12 basis points paid upfront on the settlement date
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Settlement Risk Eliminated – Paired-off trades; substitutions routed via FICC
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Counterparty Risk Eliminated – Securities returned at trade inception
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Enhanced Yield – 12 bps received in exchange for substitution rights
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Portfolio Mix Enhanced – More Treasuries when spreads tighten vs. other asset classes
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Fund Flexibility – Terminate trades at will - liquidity alignment preserved; safety intact
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No New Legal Overhaul – Familiar MRA Annex structure – no new legal review needed
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Operational Simplicity – Seamless integration with current operations facility
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Counterparty Optionality –Execute with ALP or any qualified counterparty
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MMF Open Repo Limit Exemption – FCR is closed, not open – avoids MMF Repo exposure constraints
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MMF Sec Lend Overlay Compatible – Enhances lending programs without increasing risk
How MMFs Execute FCR Trades
Step #1: The initial step involves the U.S. Treasury Beneficial Owner (MMF) and AgentLenderPLUS (ALP) signing a Master Repurchase Agreement, with the FCR Annex.
Step #2: The MMF and ALP buy and sell identical Repos for the same term, using the same securities. This paired-off transaction eliminates settlement and counterparty risk, ensuring the securities and cash remain in the MMF.
Step #3: On the settlement date, ALP wires 12 basis points as an upfront payment to the MMF for the right to make unlimited collateral substitutions under the terms stipulated in the FCR Annex. This step eliminates credit risk.
Step #4: Periodically, ALP will make collateral substitutions under the FCR Annex. The Annex ensures that, throughout the life of the trade, the Weighted Average Maturity (WAM) of the FCR Treasury portfolio varies by no more than ±5 days. Because substitutions are settled under Fixed Income Clearing Corporation membership, settlement risk is again eliminated.
Step #5: At the end of the Repo term, the MMF assumes legal ownership of all securities currently in its custody account post collateral substitution. This is achieved by selling the original securities and buying the current securities held at equal yield; all transactions are paired off to eliminate settlement risk (as in Step #2).
Bottom Line
FCR provides an elegant, low-friction way to enhance returns without altering a fund’s core liquidity profile or risk tolerance. It is innovation by refinement, not reinvention.
For additional information, please contact: Lew Goldman at lgoldman@agentlenderplus.com
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