Commentary: SIFMA report ignores repo risk

CommentaryDear readers,

Last month the Securities Industry and Financial Markets Association, better known as SIFMA, published its US Repo Market Fact Sheet, 2015.

This fact sheet contains the following paragraph:

Safety of the repo market: The repo market has been tested over the years and during the recent credit crisis, and performed reliably. Repos offer cash providers collateralization (with additional margin requirements in most cases) and that collateral is marked-to-market daily to ensure continuing protection. The operational efficiencies developed through tri-party repo and the largely-centralized settlement mechanism for repos further minimizes risks. In addition, recent reforms in the tri-party repo market have further enhanced the resiliency of this market. Market standard documentation, broadly accepted in the market, provides further certainty for market participants.

Let’s just call this what it is:  patent nonsense. 

Anyone reading RepoWatch knows that the repurchase market was the financial crisis in 2008.  After experts’ full-throttle warnings last year, it’s deeply troubling that an association many people depend upon for reliable statistics and analysis could publish this paragraph with a straight face. 

On July 23, I emailed the following question to SIFMA’s media contacts Katrina Cavalli, Liz Pierce and Carol Danko.

Question: How do you respond to the reports from regulators – for example, here – that the repurchase market was central to the financial crisis in 2008, and why do you not mention the important steps the Fed took to keep the market from freezing?

Hearing nothing, I resent the email on August 5.

I am still waiting for a reply, and if it comes I will post it here.

Mary Fricker
Editor, RepoWatch






3 responses to “Commentary: SIFMA report ignores repo risk

  1. I give you credit for being disruptor. SIFMA is a dealer supported entity that has to tow the official line. The two clearing banks, so central to the repo markets, are a reason for concern as they are conflicted with self interest and thus have a vested interest in protecting their interests first at whatever the cost to the system. The improvements cited are cosmetic and lead to complacency. While DOD at the Fed is down substantially this is a behavioral change that really masks the lack of structural progress made in the repo markets since the crisis. It is regrettable that the the repo markets were not required to develop CCPs as the OTC Swap markets were make to do under Dodd-Frank. The Fed should be urging participants to make structural changes to a vital funding vehicle that could so quickly become unstable should a credit issue materialize. Today’s WSJ article shows a possible catalyst for such an event should the balance sheet vehicles have to brought back on balances sheet as SIVs were in 2007.

  2. Mary has once again hit the nail on the head. I guess the SIFMA staff does not read the Fed’s publications. As in FEDS Notes of June 2014 which begins with the following statement “One of the main culprits (in financial crisis of 2007 to 2009) was the market for security repurchase agreements, commonly referred to as RPs or repo.” Enough said.

  3. Stephen Malekian

    Blaming the financial crisis on the Repo market is like blaming your insurance policy for your house burning down. The truth of the matter is that the repo markets functioned quite well during that period, but the underlying premise around a collateralized loan is that in an event of default, you can liquidate your collateral “in the market” and take the proceeds, recouping what you had lent, and return the haircut to the defaulting party should you be able. That’s how every legal agreement that governs a repo transaction reads. There has always been the assumption that there is a market. But in ’07-’08 there was no market. The private label mortgage market was built on a house of cards, facilitated by the politicians that wrote the laws, the loan originators that lent money to those who purchased homes with no visible means of servicing the debt, the mortgage backed division of banks that securitized the loans and the rating agencies that rated the process of the securitization without passing judgement on the creditworthiness of the counterpart or the liquidity of the underlying…all done for a fee. The regulators have destroyed the business model of the banks all in an effort to shrink them while under the guise of protecting the tax payer. Banks have no ability to meet the return hurdles on the ratios on capital, leverage and liquidity versus the banks cost of long term capital. So the excess liquidity lies fallow down at central banks and now the lack of liquidity, shrinking volumes and added volatility in the cash markets has the regulators bemoaning their own rules. What the regulators have done to the banking system, in effect, has burned the village in order to save it. It’s publications like RepoWatch which give the product a bad name and fosters the vilification of an entire industry. As Kris Berry states above, you’ve “hit the nail on the head” alright Mary.

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