FT: U.S. Repo market may be revamped

The crisis of 2007 and 2008 made U.S. bank regulators realize the repurchase market is seriously flawed and may need to be restructured, according to a package of stories in The Financial Times June 21, 2009.

Accompaying the stories is an interactive graphic that shows how repurchase market transactions, called repos, work.

From the package:

Fed plans repo markets revamp
–The U.S. Federal Reserve is considering dramatic changes to the giant repurchase – or repo – markets where  banks around the world raise overnight dollar loans.

Push to reduce risks in short-term funding
–The demise of leading U.S. investment banks last year focused regulatory attention on a crucial area of financial plumbing and sparked a debate about the future of the repurchase – or repo – market.

Lehman creditors in fight to recover collateral
–Leading hedge funds have been buying up Lehman Brothers’ debt in the hope that the bankrupt investment bank’s estate will be able to win court battles to recover billions of dollars in collateral held by competitors with whom it did business.

Repo market Q&A

–What is the repo market?
In a repo transaction, an investor lends cash for a specified period. The institution borrowing those funds provides collateral.

–What kind of collateral?
Collateral can include US Treasury bonds and other fixed income securities. During the credit boom, the use of lower quality assets such as private label mortgages and structured products including collateralised debt obligations became popular.

–What is the “tri-party” repo market?
This is where a custodian bank, generally led by Bank of New York Mellon and JPMorgan, acts as an intermediary and alleviates the administrative burden between two parties engaging in a repo transaction. The custodian matches cash lenders with institutions looking to finance their assets and provides a cost-effective way for lenders to engage the repo market.

–Who used the tri-party repo market before the crisis?
Investment banks such as Bear Stearns and Lehman Brothers were big users of the tri-party repo market before their demise.

The Bank of International Settlements says that the former top US investment banks funded about half of their assets using repo markets, with additional exposure due to off-balance sheet financing of their customers.

Between 2002 and the end of 2007, repo markets in the US and Europe each doubled in size, according to the BIS.


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