Tapering of bond purchases by the Federal Reserve and tougher regulation will impact the US tri-party market after a year of declining volumes, according to Fitch Ratings.

The market dropped 14% in 2013 to $1.61trn according to data from the Federal Reserve Bank of New York.

Agency mortgage-backed repo and treasury repo were affected as interest rates began to rise in May 2013 on the back of discussions of QE tapering. Agency MBS repo fell 28% while treasury repo fell 10%.

Fitch said that valuation losses, amplified by the use of leverage in repos, and resulting market volatility, are likely to have contributed to lower volumes. The ratings agency also pointed out that the drop has been partially offset by moderate increases in equity, structured finance and corporate repo collateral which have given higher yields in the low interest rate environment.

“The interest rate environment will remain a source of uncertainty in 2014 affecting incentives for repo market participants and the supply of repo collateral,” said Fitch.

The Basel Committee’s proposed limited bilateral netting in the leverage ratio could alleviate some of the regulatory capital pressures faced by banks involved in repo, but Fitch said it depends how the changes will be implemented. Minimum leverage ratio standards could vary across jurisdictions as these have yet to be finalised by national regulators.

Repo lenders and borrowers will also be watching out for future regulatory focus on potential fire sale risks.

Fitch said: “This policy uncertainty could shift the competitive landscape for repo activities. Volumes could also migrate to the shadow banking sector and financial institutions not subject to these rules.”