The biggest news about the repurchase market in 2016 was how little has changed since 2008.
A year ago, the future looked brighter.
2015 was a hopeful year for people who want to see a solution to the risks that the repurchase market poses to the financial markets and to the economy. In 2015 repos got a ton of press, after being invisible for decades, and just bringing them into the light seemed like a big step forward. Something was bound to happen.
It did. In 2016 two alternate universes emerged, telling very different stories.
One crowd ran around warning about a repurchase market that’s shrinking, a desperate need for collateral. a Federal Reserve that’s hogging the market and regulations that are strangling credit in a struggling economy.
The other crowd ran around warning about risk moving into the shadows, Wall Street traders borrowing short to lend long, repo fire sales as dangerous as ever and financial institutions still too interconnected to fail.
You can see this glaring disconnect in the list of 2016 news reports below.
If this is the result after eight years of the Obama Administration, it’s hard to envision solutions to systemic risk emerging during the Trump Administration, which has said it wants to get government off the backs of the financial markets.
In spite of the paralysis, news did happen in 2016. So RepoWatch presents its first annual Notable News Awards for 2016:
Biggest News of 2016: Finally we have an idea of the size of the bilateral repo market.
January 13, 2016: The Office of Financial Research reports from its surveys of the bilateral repo and securities lending markets that bilateral repo loans total about $1 trillion daily, with the vast majority being overnight or recallable at any time and one-third being transactions that occurred within a giant bank holding company.
Most Sobering News of 2016: There’s no way out.
April 2016: After deposit insurance was implemented in 1934, banks were mainly funded by insured deposits. But in the financial crisis we learned banks had come to rely on wholesale financing like repurchase agreements, which is vulnerable to runs. “There can be no returning to ‘normal’ because the financial system has permanently changed,” wrote Yale Professor Gary B. Gorton in “The History and Economics of Safe Assets.” (RepoWatch editor’s note: Gorton was the first economist to force attention onto the role that the repurchase market played in the crisis of 2008.)
Most Important News of 2016: Finally someone is going to collect data on the bilateral repurchase market.
December 13, 2016: “The Office of Financial Research expects to soon announce details of our proposed permanent bilateral repo data collection, which will be followed by a securities lending collection,” wrote the Office of Financial Research in its annual Financial Stability Report.
Best Historical Insight of 2016: After 30 years of repo crises, today’s inertia can not be blamed on ignorance.
March 30, 2016: When a massive run hit Continental Illinois commercial bank in May 1984, the heaviest withdrawals were by repurchase and Federal Funds lenders, wrote economists for the Bank for International Settlements. (RepoWatch editor’s note: Repo lenders also were a big problem at American Savings and Loan when it failed in 1988 and at Long-Term Capital Management when it failed in 1998. Thanks to authors Michael Robinson and Roger Lowenstein for these insights.)
Best Telling-It-Like-It-Is of 2016: There’s an alternative to repos. It’s called due diligence.
February 9, 2016: Transactions like repo that are secured by collateral should be discouraged because collateral is just a substitute for doing due diligence, said Boston College finance professor Edward Kane during an interview with the Institute for New Economic Thinking
Most Thought-Provoking News of 2016: Our financial markets and our government have become incestuously interdependent.
October 17, 2016: “Markets are now thoroughly addicted to US Treasuries” to meet collateral and capital requirements, which means financial markets will be in trouble if the U.S. ever gets serious about reducing its deficit, wrote Richard Stinchfield for Securities Finance Monitor.
Scariest News of 2016: RepoWatch’s 15 favorite warnings of the year, listed chronologically:
January 4, 2016: Federal Reserve Vice Chairman Stanley Fischer told the American Economic Association that the Fed may not have the tools it needs to deal with another financial crisis, wrote BloombergBusiness reporter Rich Miller. “We won’t know until it’s very late,” Fischer said
February 2016: Regulation of the financial markets is too complicated, there are too many overlapping regulators, and oversight of the systemically risky repurchase market is slipping through the cracks, said the General Accounting Office in a sharply worded report to Congress.
February 10, 2016: The financial crisis can be thought of as an old-fashioned bank run, but on the shadow banks. When the next financial crisis comes, and it will, that’s when we’ll find out if reforms since the crisis will work, including the Fed’s new role as the emergency lender to the overall shadow banking markets like repo and the FDIC role in unwinding insolvent companies like Lehman Brothers, Federal Reserve Vice Chairman Stanley Fischer said in a speech.
February 23, 2016: Large banks are reducing their repo activity as new regulations make it more expensive. Smaller banks, money market funds, securities dealers, smaller investors and financial firms are taking up the slack but aren’t likely to be willing to be the market makers who prevent volatile pricing, wrote Wall Street Journal blogger Jon Sindreu.
March 31, 2016: Breaking up the big banks will not prevent financial crises because banks only provide about one-fourth of the credit that the U.S. economy needs. The rest has to come from repo and other short-term wholesale lenders who can easily run at signs of trouble, wrote Randal K. Quarles and Lawrence Goodman in the Wall Street Journal.
May 20, 2016: “The extensive involvement of an insurance firm in securities lending, repo, over-the-counter derivatives, and other capital markets activities can create a balance sheet with much tighter connections to the rest of the financial system and greater liquidity risk in times of financial market stress,” Federal Reserve Governor Daniel K. Tarullo told an International Insurance Forum.
May 25, 2016: Although progress has been made since the financial crisis, efforts to reduce systemic risk in shadow banking are at a “relatively early stage” and much is left to do, said the Financial Stability Board in a progress report.
June 2016: Stanford University economist Darrell Duffie argued in an assessment of financial-stability reform after the crisis that bank regulation has four core elements and only one can be scored a clear success. “The biggest risk is that of a fire sale of securities in the event of the inability of a major broker dealer to roll over its securities financing under repurchase agreements.”
July 13, 2016: The repurchase market is opaque, traders have conflicts of interest and it’s a source of systemic risk. None of this has been fixed since the crisis, writes Paolo Saguato, a fellow at the London School of Economics.
July 14, 2016: The U.S. Treasury’s Office of Financial Research published a map of systemic risk in the financial markets that shows how runs on the repurchase market caused the crisis at Bear Stearns in 2007 and 2008.
August 12, 2016: World wide regulators’ refusal to regulate repo markets since the financial crisis means that central banks will continue to be called upon to support the value of collateral in times of crisis, wrote Daniela Gabor, associate professor at the University of the West of England, Bristol. This protects financial markets (Wall Street) from collapse, and it’s different from the pre-1980s days when repo was a fringe market and central banks’ lender of last resort policies protected banks (Main Street) from collapse.
October 17, 2016: The risk of using short-term loans to buy long-term investments is higher than it has ever been because of high volatility, redemption spikes and rapid price falls in the bonds markets, wrote FitchRatings analysts.
October 2016: Insurance companies that own securities may lend them for cash so they can reinvest the cash and make more money, and when securities borrowers demand their cash back that can trigger crises like the Great Financial Crisis of 2008, wrote Fed analysts Nathan Foley-Fisher, Borghan Narajabad, and Stephane Verani.
October 21, 2016: Federal Reserve governor Daniel Tarullo said he worries most about fire sales of securities forced by runs in short-term wholesale funding markets like repo and on investment funds, wrote reporter Katy Burne with the Wall Street Journal.
December 5, 2016: The (Paul) Volcker Alliance released “Unfinished Business: Banking In The Shadows,” which argued that post-crisis reforms don’t solve the main cause of the financial crisis. “Highly leveraged and interconnected financial firms continue to rely on panic-prone funding structures, posing the clear risk of contagious ‘runs,’ the central and highly damaging characteristic of the 2008 crisis,” said the report, which proposed regulation.
Repo news reports in 2016
Following are the 2016 news and analyses captured by the annual RepoWatch survey. These items first appeared in the Breaking News section of the RepoWatch website. They are listed here in reverse chronological order, with the most recent report first:
December 22, 2016: Bloomberg is working with Russian groups to set up a tri-party repo service for over-the-counter transactions, with the aim of making repo and the use of collateral more efficient, according to an announcement from the National Settlement Depository in Moscow.
*****
December 13, 2016: “Runs and fire sales in secured funding markets were a key amplifier in the financial crisis. … The Office of Financial Research expects to soon announce details of our proposed permanent bilateral repo data collection, which will be followed by a securities lending collection,” wrote the Office of Financial Research in its annual Financial Stability Report.
*****
December 8, 2016: A U.S. House subcommittee held a hearing on “The Impact of regulations on Short-Term Financing” and heard testimony that post-crisis regulations are limiting Main Street and municipality access to repurchase agreements, money market funds, and securities financing, the subcommittee reported.
*****
December 8, 2016 : The European Central Bank extended its bond-buying program nine months, but in an effort to keep the repo market supplied with bonds it will lend the bonds to investors who use cash as collateral, wrote reporter Jon Sindreu for the Wall Street Journal. Until now the collateral had to be securities.
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December 5, 2016: The (Paul) Volcker Alliance released “Unfinished Business: Banking In The Shadows,” which argues that post-crisis reforms don’t solve the main cause of the financial crisis. “Highly leveraged and interconnected financial firms continue to rely on panic-prone funding structures, posing the clear risk of contagious “runs,” the central and highly damaging characteristic of the 2008 crisis,” said the report, which proposes regulation.
*****
December 8, 2016: Rates based on repo transactions could be good candidates for an alternative to the LIBOR rate, and the Office of Financial Research is well along in collecting data, said Richard Berner, the office’s director.
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November 27, 2016: To get around regulations intended to limit risky lending, some Chinese shadow bankers are “buying stock” which the seller agrees to repurchase with interest on a certain date. This is an effort to make a (repo) loan appear to be an investment, wrote Gabriel Wildau for the Financial Times.
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November 18, 2016: The Federal Reserve has become the biggest player in the repurchase market, using the vast trove of securities it acquired during the financial crisis as collateral for loans, for example from money market funds, wrote Bradley Keoun at TheStreet. Critics say this crowds out private companies, distorts pricing, and could make the Fed vulnerable to a financial crisis, as Lehman Brothers was.
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November 16, 2016: As part of “The Minnneapolis Plan To End Too Big To Fail” by the Federal Reserve Bank of Minneapolis, shadow banks would have to pay a tax on borrowing of 2.2 percent if they’re systemically important and 1.2 percent if they’re not. The purpose of the tax is to discourage borrowers from migrating from banks to shadow banks.
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November 10, 2016: The introduction in 2012 of the supplementary leverage ratio as a way to strengthen banks in times of stress may instead cause broker-dealers affiliated with bank holding companies to use riskier securities as repo collateral and result in more nonbank dealers doing repurchase transactions, wrote researchers at the Office of Financial Research.
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November 9, 2016: Expect Republicans to undo major portions of financial regulation enacted in the last eight years, wrote Josh Galper at Securities Finance Monitor. “Hold on to your seats” and “the right balance needs to be found between global risk management and free-wheeling markets,” he wrote.
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November 7, 2016: Wells Fargo has nearly tripled its repo lending since 2013 while other large banks with lower levels of capital have been cutting back, wrote reporter Bradley Keoun with TheStreet.
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November 4, 2016: The Federal Reserve Bank of New York said it may start publishing three interest rates based on overnight repurchase agreements collateralized by Treasury securities, forcing visibility onto the market and potentially preventing it from becoming the invisible time bomb it was in 2008.
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November 2016: Income tax deductions for interest on debt encourage financial institutions to take on levels of debt that may threaten their stability, as was seen in 2008, wrote International Monetary Fund analysts.
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October 2016: Insurance companies that own securities may lend them for cash so they can reinvest the cash and make more money, and when securities borrowers demand their cash back that can trigger crises like the Great Financial Crisis of 2008, wrote Fed analysts Nathan Foley-Fisher, Borghan Narajabad, and Stephane Verani.
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October 27, 2016: The Office of Financial Research is preparing to require financial institutions to report their bilateral repurchase and securities lending transactions, said director Richard Berner.
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October 24, 2016: As JP Morgan gradually stops serving as a tri-party repo clearing bank for broker-dealers over the next two years, leaving only BNY Mellon in that role, the Federal Reserve is working to preserve the integrity of the market, said Federal Reserve governor Jerome Powell.
*****
October 21, 2016: Federal Reserve governor Daniel Tarullo said he worries most about fire sales of securities forced by runs in short-term wholesale funding markets like repo and on investment funds, wrote reporter Katy Burne with the Wall Street Journal.
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October 20, 2016: Demand for collateral is rising and the repurchase market is an efficient way to get it, but a shortage of securities is a problem for the market, wrote reporter Thomas Hale at Reuters.
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October 19, 2016: A shortgage of high-quality collateral and tighter post-2008 regulations are limiting the repurchase market, “an essential source of finance,” and causing problems for European central bankers, blogged Jon Sindreu for The Wall Street Journal.
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October 19, 2016: Swiss financial services giant Tradition reported it is responding to stress on the repurchase market – rising demand, falling supply and rising prices for high-quality collateral – by launching Elixium, which will connect repo borrowers and lenders worldwide.
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October 18, 2016: As regulators require more nimble collateral for uncleared derivative trades, traders are increasingly turning to the repurchase market to raise cash that they can use as that collateral. That could create “unintended repo risks,” wrote GlobalCapital.
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October 17, 2016: “Markets are now thoroughly addicted to US Treasuries” to meet collateral and capital requirements, which means financial markets will be in trouble if the U.S. ever gets serious about reducing its deficit, wrote Richard Stinchfield for Securities Finance Monitor.
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October 17, 2016: A shortage of collateral is causing problems for banks, mutual funds and other institutions that use the repurchase market to get short-term loans or make short-term deposits, wrote reporters Elaine Moore and Thomas Hale with the Financial Times.
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October 17, 2016: The risk of using short-term loans to buy long-term investments is higher than it has ever been because of high volatility, redemption spikes and rapid price falls in the bonds markets, wrote FitchRatings analysts.
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October 13, 2016: In October, repo holdings by money market funds reached record levels and broke $800 billion for the first time ever, driven by investors’ shift from prime and tax-exempt funds to government funds, reported Crane Data.
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October 11, 2016: JP Morgan’s withdrawal from the $1.6 trillion tri-party repo market, expected within the next 18 months, leaves only BNY Mellon to clear that vital market and raises questions and concerns, wrote reporter Joe Rennison at the Financial Times.
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October 11, 2016: Insurers, endowments and REITs are increasingly replacing primary dealers in repo transactions with money market funds, reported Moody’s Investor Service.
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September 29, 2016: The European repurchase market continues to shrink, according to data from the International Capital Markets Association, wrote reporter Lukanyo Mnyanda for Bloomberg.
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September 25, 2016: BlackRock, Vanguard and Fidelity objected to the Financial Stability Board’s contention that mutual funds can cause panic with fire-sales of securities, with Fidelity calling the concern conjecture and speculation, wrote Bloomberg reporter Silla Brush.
*****
September 2016: The most important new bank regulation of the post financial crisis era is the Bank for International Settlement’s Liquidity Coverage Ratio, which requires that net short-term uninsured bank debt like repos be backed one-for-one with U.S. Treasuries or other high quality bonds. Based on historical experience, the regulation is unlikely to reduce financial fragility and may increase it, wrote Yale School of Management professors Gary Gorton and Tyler Muir.
*****
August 24, 2016: Professor Laurence Ball at Johns Hopkins University reports research he said shows that the Federal Reserve erred when it said it did not have the legal authority to save Lehman.
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August 18, 2016: Financial Times editor Gillian Tett thinks regulators better look carefully at JP Morgan’s partial withdrawal from tri-party repo, to see if it’s a sign that the vital repurchase market is in trouble.
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August 16, 2016: A key reform after the financial crisis has been to encourage greater use of central counterparties for repo contracts and securities financing. Today the Financial Stability Board released its initial ideas on how to make sure CCPs don’t themselves become a new source of too-big-to-fail risk. Response is due by October 17.
*****
August 16, 2016: Four leading European regulators today released an update on their joint efforts to develop ways to ensure that central counterparties are resilient during financial crises. Their work will continue into 2017.
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August 12, 2016: World wide regulators’ refusal to regulate repo markets since the financial crisis means that central banks will continue to be called upon to support the value of collateral in times of crisis, wrote Daniela Gabor, associate professor at the University of the West of England, Bristol. This protects financial markets (Wall Street) from collapse, and it’s different from the pre-1980s days when repo was a fringe market and central banks’ lender of last resort policies protected banks (Main Street) from collapse.
*****
August 12, 2016: The health of both the primary and secondary markets for Treasury securities is tied to that of the repo market. Since the financial crisis that market has moved within a relatively stable range, even though the market itself has seen several important changes, wrote U.S. Treasury officials James Clark and Tom Katzenbach.
*****
August 11, 2016: Bankers want to weaken one of the most important rules that regulators plan to implement following the financial crisis, the leverage ratio, and regulators should not give in, wrote FDIC vice chairman Thomas Hoenig in the Wall Street Journal.
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August 5, 2016: Credit Suisse economists Zoltan Pozsar and Sarah Smith said the impact of Prime money market fund reform on repo rates appears to be relatively minor.
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July 2016: “The size and trading activity of repo markets imply that liquidity risk is limited under normal market conditions, but … the very limited information available on repo transactions and exposures makes it challenging to assess what might happen under stressed market conditions,” reported the European Systemic Risk Board.
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July 21, 2016: The Securities Industry and Financial Markets Association issued its annual Repo Market Fact Sheet and repeated its yearly claim that the repo market “performed reliably” during the financial crisis.
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July 21, 2016: JP Morgan is getting out of the niche repo business called GFC Repo, where it transacts repurchase agreements for 30 broker-dealers with Treasury and agency securities as collateral, reported Katy Burne for the Wall Street Journal. These dealers will likely take their $40 billion in transactions to BNY Mellon, which is the only bank still offering this service. JP Morgan is not exiting its tri-party repo service.
*****
July 20, 2016: The Treasury’s Office of Financial Research released a computer program that shows extensive detail on money market fund repos. Wall Street Journal reporter Katy Burne said the data shows that money market funds are doing many more repos directly with borrowers rather than going through broker-dealers.
*****
July 18, 2016: Emails released in a Guernsey courtroom show how repo runs created panic at the Carlyle Capital Corp. investment fund in 2007, wrote Wall Street Journal reporter Margot Patrick.
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July 14, 2016: The U.S. Treasury’s Office of Financial Research published a map of systemic risk in the financial markets that shows how runs on the repurchase market caused the crisis at Bear Stearns in 2007 and 2008.
*****
July 13, 2016: The repurchase market is opaque, traders have conflicts of interest and it’s a source of systemic risk. None of this has been fixed since the crisis, writes Paolo Saguato, a fellow at the London School of Economics.
*****
July 12, 2016: To what extent should regulation of shadow banking include the government issuing securities that could be used as safe collateral and would not cause runs as happened in 2007 and 2008, Federal Reserve Governor Daniel Tarullo asked in a speech in Washington, D.C.
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June 2016: Stanford University economist Darrell Duffie argues in an assessment of financial-stability reform after the crisis that bank regulation has four core elements and only one can be scored a clear success. “The biggest risk is that of a firesale of securities in the event of the inability of a major broker dealer to roll over its securities financing under repurchase agreements.”
*****
June 24, 2016: Repo rates spiked as banks hoarded cash in the immediate aftermath of the UK decision to leave the European Union, reported the Wall Street Journal.
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May 25, 2016: Although progress has been made since the financial crisis, efforts to reduce systemic risk in shadow banking are at a “relatively early stage” and much is left to do, said the Financial Stability Board in a progress report.
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May 25, 2016: In spite of an interest in taming the repurchase market by moving most repo transactions onto central clearinghouses, the key firms involved haven’t figured out a satisfactory structure, the Fed hasn’t said it would be willing to be the lender of last resort and progress is gridlocked, wrote Bloomberg reporter Liz McCormick.
*****
May 20, 2016: “The extensive involvement of an insurance firm in securities lending, repo, over-the-counter derivatives, and other capital markets activities can create a balance sheet with much tighter connections to the rest of the financial system and greater liquidity risk in times of financial market stress,” Federal Reserve Governor Daniel K. Tarullo told an International Insurance Forum.
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May 18, 2016: Participants at a symposium on Too Big To Fail hosted by the Federal Reserve Bank of Minneapolis were less concerned about the size of the big banks than about their interconnectedness, according to Pro-Market, a blog of the Stigler Center at the University of Chicago Booth School of Business.
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May 12, 2016: Fixed Income Clearing Corp., the repo market’s only clearinghouse, is asking key customers to agree in advance to cover a cash shortfall at FICC, caused by a trader’s default, by buying U.S. government bonds from FICC. The Federal Reserve and the Securities and Exchange Commission are pushing the FICC to bolster its capital cushion, perhaps by more than $50 billion, wrote reporter Katy Burne at the Wall Street Journal.
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May 9, 2016: “The Fed deserves significant praise for moving forward with a thoughtful and promising measure to further limit risks to financial stability,” wrote Jeremy R. Newell, general counsel of The Clearing House Association. Newell applauded the Fed’s May 3 proposal that lenders agree not to seize repo and derivative collateral for up to 48 hours after a global systemically important bank (GSIB) fails.
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May 9, 2016: If the Fed’s proposed 48-hour bankruptcy stay for repos and derivatives is trying to protect individual investors, especially pensioners, that’s a worthy goal but the wrong approach, wrote Richard Stinchfield for Securities Finance Monitor.
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May 4, 2016: The Fed’s proposed 48-hour bankruptcy stay for repos and derivatives is about making these transactions safer while making them feel less safe, wrote Matt Levine for BloombergView.
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May 4, 2016: Josh Galper at Securities Finance Monitor wrote that he wished the press understood that securities finance benefits real people – like investors and retirees – and is neither illegal nor immoral.
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May 3, 2016: The Federal Reserve proposed that global systemically important banks (GSIBs) be required to amend their bilateral, uncleared repurchase, securities lending and derivative contracts. The amendment would require lenders to agree not to seize collateral for up to 48 hours after a GSIB files bankruptcy, to permit an orderly unwind. Regulators will accept comments on the proposal until August 5.
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May 3, 2016: Federal regulators proposed that large banking organizations be required to maintain a level of stable funding to balance their repurchase, derivative and other short-term activities. Regulators will accept comments on the new rule, called the net stable funding ratio, through August 5.
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April 2016: After deposit insurance was implemented in 1934, banks were mainly funded by insured deposits. But in the financial crisis we learned banks had come to rely on wholesale financing like repurchase agreements, which is vulnerable to runs. “There can be no returning to ‘normal’ because the financial system has permanently changed,” wrote Yale Professor Gary B. Gorton in “The History and Economics of Safe Assets.”
*****
April 27, 2016: BNY Mellon is trying to move into the European repo market, wrote Rick Baert with Pensions Investments.
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April 18, 2016: Options, futures and swaps are growing in popularity as repo and securities lending declines, wrote Salim Nemouchi for Securities Finance Monitor.
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April 18, 2016: The proximate cause of the benchmark fails in the first half of March was a limited supply of the 10- and 30-year securities relative to the demand to borrow these securities to cover short positions, wrote Liberty Street Economics.
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April 18, 2016: The U.S. Treasury is interviewing bond dealers about whether a move toward central clearing would help or harm the repurchase-agreement market, wrote Liz McCormick at Bloomberg.
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April 14, 2016: Traders on the repo desk are the lowest-paid London traders, wrote Vic Daniels at HITC Business.
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April 13, 2016: Last month’s spike in failed trades in Wall Street’s key funding market sparked fears that it could be a sign of trouble brewing in the U.S. financial system, but the disruptions appear more likely to mark the “new normal” of the post-crisis era, wrote Richard Leong with Reuters.
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March 31, 2016: Breaking up the big banks will not prevent financial crises because banks only provide about one-fourth of the credit that the U.S. economy needs. The rest has to come from repo and other short-term wholesale lenders who can easily run at signs of trouble, wrote Randal K. Quarles and Lawrence Goodman in the Wall Street Journal.
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March 31, 2016: Rates on overnight repos soared the last day of March to their highest levels since September 2008 as banks did some quarter-end window dressing to please regulators, wrote Wall Street Journal reporter Katy Burne.
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March 30, 2016: When a massive run hit Continental Illinois commercial bank in May 1984, the heaviest withdrawals were by repurchase and Federal Funds lenders, wrote economists for the Bank for International Settlements.
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March 29, 2016: The Bank of England said it will publish a report on how post-crisis regulation may restrict trading as seen in the shrinkage of the repo market.
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March 29, 2016: The Depository Trust Clearing Corporation said it will develop and test a streamlined way to clear and settle U.S. Treasury and Agency repurchase agreements using blockchain distributed ledger technology.
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March 15, 2016: Money creation, e.g. the repurchase market, should be restricted to the government and to insured banks, wrote Vanderbilt Law School professor Morgan Ricks in his new book “The Money Problem: Rethinking Financial Regulation.”
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March 10, 2016: To satisfy post-crisis regulations requiring them to do less overnight borrowing, banks are entering into more “extendable” repos that can be renewed if both parties agree and require some notice before being terminated, wrote BloombergBusiness reporters Liz McCormick and Tracy Alloway.
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March 4, 2016: Problems in the U.S. repo market were a catalyst for the financial crisis, but the European repo market fared much better mainly because (1) much European repo was done through a central counterparty clearinghouse, (2) counterparties were anonymous, (3) collateral was safer and (4) repo deals unwound when they matured, not daily as they do in the U.S. tri-party market. This research comes from three Swiss academics, Loriano Mancini of the Swiss Finance Institute and Angelo Ranaldo and Jan Wrampelmeyer at the University of St.Gallen.
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March 4, 2016: Bilateral securities lending is growing as new regulations are making it harder for hedge funds and asset managers to get the securities they need for hedging and arbitrage strategies from large dealers and they’re going directly to securities owners, said Jeff Kidwell in his Repo Commentary.
*****
March 4, 2016: The Federal Reserve released new rules intended to limit the kind of credit transactions among large financial institutions that were the key reason major companies had to be bailed out in 2008, including repurchase agreements, securities lending, other loans and derivatives. The Fed will accept comments on the proposal until June 3.
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March 2, 2016: When the Federal Reserve increases interest rates, banks lose depositors to higher-paying investments. To compensate, big banks get more repo loans. That can increase risk to the financial markets, but regulations adopted since the crisis can mitigate that risk, wrote Liberty Street economists at the Federal Reserve Bank in New York.
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March 1, 2016: If new regulations make it hard for managers of public pension plans to boost their returns by borrowing on the repurchase market, it will be harder for them to bridge the $1 trillion gap between their assets and what they’ve promised to workers. That shortfall could become a cost to taxpayers, according to Credit Suisse analyst Zoltan Pozsar as reported by Alexandra Scaggs and Luke Kawa for BloombergBusiness.
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March 1, 2016: The pilot program that the Office of Financial Research announced several months ago to collect data on the bilateral repo market is getting its information from Bank of America Corp., Barclays PLC, Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings PLC, J.P. Morgan Chase & Co., Morgan Stanley, Royal Bank of Scotland Group PLC and UBS Group AG, according to Wall Street Journal reporter Katy Burne.
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March 2016: One of the key problems facing the global financial markets is the tremendous increase since 2008 of reliance on collateral for safety. Services that supply that collateral – such as collateral optimization, collateral transformation, collateral arbitrage, re-hypothecation and reuse – may increase risk to the financial markets. More data is needed, said the International Organization of Securities Commissions in its Securities Market Risk Outlook 2016.
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February 2016: Regulation of the financial markets is too complicated, there are too many overlapping regulators, and oversight of the systemically risky repurchase market is slipping through the cracks, said the General Accounting Office in a sharply worded report to Congress.
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February 27, 2016: The Dodd-Frank Act has been gutted in several important ways, wrote Harvard professor of capital formation and growth Jeffrey Frankel.
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February 23, 2016: Large banks are reducing their repo activity as new regulations make it more expensive. Smaller banks, money market funds, securities dealers, smaller investors and financial firms are taking up the slack but aren’t likely to be willing to be the market makers who prevent volatile pricing, wrote Wall Street Journal blogger Jon Sindreu.
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February 23, 2016: The Financial Stability Board is calling for comments on ways to measure the re-use of non-cash collateral in securities financing transactions like repo. Collateral re-use plays an important role in the functioning of financial markets but it also can pose risks to the financial system, the board said.
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February 16, 2016: Congress needs to break up the too-big-to-fail banks and “tax leverage throughout the financial system to reduce systemic risks wherever they lie,” said Neel Kashkari, new head of the Minneapolis Fed. He formerly managed key parts of the banking and auto industry bailouts for the U.S Treasury and, before that, was a Goldman Sachs executive. The Dodd-Frank Act did not go far enough, he said he has concluded.
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February 10, 2016: The financial crisis can be thought of as an old-fashioned bank run, but on the shadow banks. When the next financial crisis comes, and it will, that’s when we’ll find out if reforms since the crisis will work, including the Fed’s new role as the emergency lender to the overall shadow banking markets like repo and the FDIC role in unwinding insolvent companies like Lehman Brothers, Federal Reserve Vice Chairman Stanley Fischer said in a speech.
*****
February 9, 2016: Banks should have to pay a quarterly dividend to the U.S. Treasury for the risk that taxpayers are forced to take as lenders of last resort in a crisis. And transactions like repo that are secured by collateral should be discouraged because collateral is just a substitute for doing due diligence. Boston College finance professor Edward Kane made these points in an interview with the Institute for New Economic Thinking.
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Winter 2016: Reforms after the financial crisis may have reduced systemic risk for the repurchase market but they have increased risk for individual dealers, wrote Jeff Kidwell, head of Direct Repo at AVM L.P. in his summary of reforms published by the Government Investment Officers Association in their GOIA Update newsletter.
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January 28, 2016: Citigroup Inc. had one of its most profitable years in recent history in the repurchase-agreement market, countering much of the industry grumbling that regulation is crushing this business, wrote reporter Eshe Nelson with BloombergBusiness.
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January 27, 2016: In its 2015 annual report to Congress, the U.S. Treasury’s Office of Financial Research reported that this year it is going to create a “significant” permanent collection of bilateral repo and securities lending data. These markets are vulnerable to runs, the report said.
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January 26, 2016: The $278.4 billion California Public Employees’ Retirement System has agreed to renew its year-old agreement with derivatives clearinghouse Options Clearing Corp. to provide a $1 billion safety net in case an Options Clearing Corp. customer defaults. In return the clearinghouse pays CalPERS an undisclosed fee that rises when the clearinghouse draws on the $1 billion. The clearinghouse needs a $3 billion safety net. Banks are providing $2 billion.
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January 13, 2016: The Office of Financial Research reports from its surveys of the bilateral repo and securities lending markets that bilateral repo loans total about $1 trillion daily, with the vast majority being overnight or recallable at any time and one-third being transactions that occurred within a giant bank holding company.
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January 10, 2016: The Federal Reserve is considering setting margin requirements for repurchase transactions as a way to reduce risk, wrote reporter Ryan Tracy for the Wall Street Journal. Repo margin is the value of collateral above the loan amount that a borrower must post to get a repo loan.
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January 4, 2016: Federal Reserve Vice Chairman Stanley Fischer told the American Economic Association that the Fed may not have the tools it needs to deal with another financial crisis, wrote BloombergBusiness reporter Rich Miller. “We won’t know until it’s very late,” Fischer said.
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January 2016: As U.S. regulators seemed to be encouraging more central clearing for repos, the Fixed Income Clearing Corp. was having trouble getting borrowers and lenders to commit the $50 billion safety net it said it needs before it can clear tri-party repos, wrote Euromoney magazine.
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January 2016: New regulations are increasing the possibility of a collateral shortage and changing the nature of the repo desk from a trading unit to a “centralized collateral and liquidity management hub,” wrote International Capital Markets Association director Andy Hill in the January 2016 issue of Investment and Pensions Europe magazine.
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January 3, 2016: For banks to continue to hold corporate deposits, so the deposits don’t migrate to shadow institutions like money market funds, banks need a centralized securities lending market where they can readily access the high-quality securities that new banking regulations require banks to have, wrote Guido Stroemer, the former head of repo trading at UBS, in the Financial Times.
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