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Repo ended 2020 like it began: causing trouble

Editor’s Note: The following summary of repo news in 2020 is based on the Breaking News that I post daily at repowatch.org. See the entire list of 2020 breaking news reports below this story. See 2021 breaking news reports that I’m now posting regularly at repowatch.org.

2020 ended like it began, with dire warnings about problems in shadow banking and in its main financing scheme, the repurchase market.

2021 begins with starkly different ideas on what to do about it.

Meanwhile, repo and shadow banking are spreading around the world and welcoming new kinds of securities to collateralize their loans. Serbia, Albania, Iran, Ghana, Azerbaijan and China all made repo headlines last year.

China fully opened parts of its enormous financial markets to international bankers in 2020, and this potential access to Chinese bonds as collateral for global repo transactions could be a major opportunity for growth and profit, some analysts said.  China’s onshore repo has been estimated at $1.7 trillion, maybe half the size of U.S. repo.

Other good news for repo traders in 2020 included, from Inside Mortgage Finance and Securities Finance Monitor:

  • “Epic” and “frenzied” production of home loans hit a record $4 trillion in 2020, exceeding the previous record of $3.7 trillion set in 2003. One reason was lower rates, another was that a growing number of home buyers didn’t need to have an appraisal.
  • Investors’ thirst for mortgages that don’t meet federal lending standards, so-called non-Qualified Mortgages that have a higher interest rate than a conventional mortgage, was “red hot.”
  • Traders began making repo loans against “green” collateral even though participants don’t agree on what “green” is.

Warnings about problems

These repo users ignored – maybe didn’t even notice – the warnings.

For example, the Financial Stability Oversight Council bookended the year with repo alerts. This council was created by Congress in 2010 to spot trouble and put a stop to it before it spreads.

In January 2020 the council cautioned that it’s 12 years after the financial crisis and the council still doesn’t  know much about bilateral repo, a blindness that needs to be “improved considerably.” Further, tri-party repo which was the epicenter of the 2008 blowup is now concentrated in the hands of one middleman, the Bank of New York Mellon. Meanwhile, barely regulated nonbanks now make about half of all home loans, up from 10 percent a decade ago, even though their financing is mainly run-able short-term warehouse repo lines, often with banks, often with risky contract terms, and they have four times as much debt as equity, the council said.

“A better understanding of the interdependencies among firms and market participants in the repo market is needed. The unexpected volatility in repo markets in September 2019 underscores the need for more research and analysis in this area. Additional information would help regulators and supervisors better assess potential risks and vulnerabilities,” the council said.

At the end of 2020, 12 months later, how well had the council corralled those risks?

“Recent events, including the financial fallout from the pandemic, have confirmed that potentially significant structural vulnerabilities remain in the short-term wholesale funding markets,” the Financial Stability Oversight Council said in its final 2020 report. “The Council recommends that regulators review these structural vulnerabilities …. and, if warranted, take appropriate regulatory measures to mitigate these vulnerabilities.”

Hmmm. “Big talk, little do,” some might conclude.   🙂

Others saw the final 2020 report as an important heads-up for Pres. Biden’s financial team.

“As they head out the door, Trump-led financial regulators are warning the incoming Biden team that a little-known yet critical corner of Wall Street is broken,” wrote Matt Egan for CNN Business. “Their concern centers on the short-term funding market, which provides money to businesses, local governments and market players. When this market breaks down, the entire economy can screech to a halt.”

(For newcomers, shadow banking is banking done by companies that aren’t banks. They finance a lot of their business on the repurchase or “repo” market which does loans between giant financial institutions, often for overnight, often for billions of dollars, secured by securities as collateral and vulnerable to panic.)

“An almighty mess”

When COVID-19 hit in March 2020, the Fed and other central banks had to intervene far beyond anything they tackled in the 2008 financial crisis, trying to prevent another collapse of shadow banking and an ensuing financial Armageddon. In the repurchase market, lenders ran even when their collateral was secure.

The market’s dysfunction was obvious. The way forward was not. Critics fumed.

THE FEDERAL RESERVE

• “While extraordinary central bank interventions calmed capital markets … such measures should not be required,” Federal Reserve Vice Chairman Randal Quarles wrote in a July letter to his counterparts at other central banks. It’s “more important than ever” to understand the possible threats of nonbanks, he added.

• Nonbank financial institutions and short-term borrowing were at the heart of the March turmoil, said the Federal Reserve’s Financial Stability Report. This included hedge funds, mREITS, prime money market funds and fixed-income mutual funds. “Going forward, regulatory agencies, including the Federal Reserve, are exploring reforms that will address structural vulnerabilities in the nonbank financial institutions sector that have required emergency interventions during both the 2007–09 financial crisis and the COVID-19 crisis.”

THE SECURITIES & EXCHANGE COMMISSION

• “The broad stress in the short-term funding markets caused by the COVID-19 shock demonstrated that the ability and willingness of intermediaries (e.g., “market makers”) to absorb significant, rapid shifts in investor sentiment (e.g., a “dash for cash”) is limited in absolute terms and may become more limited as spreads widen and volatility increases during periods of stress and uncertainty,” summarized the chairman and the chief economist of the Securities & Exchange Commission in an 83-page recounting of the COVID-19 financial collapse.

• The U.S. financial system is interconnected, volatile and dependent on trillions of dollars from the Federal Reserve to survive a crisis, the Securities & Exchange Commission said in its COVID-19 report.

U.S. ACADEMICS

• “We caution that such massive Fed intervention in the market should not be expected to become the norm,” wrote economists from The Federal Reserve, The Wharton School and the University of Chicago in “Financial Fragility in the COID-19 Crisis.”

• The March meltdown showed we still don’t collect the data we need to spot risk in the repurchase and securities lending markets, wrote Greg Feldberg, Research Scholar at the Yale School of Management. “Authorities were unable to answer basic questions as markets spun out of control. Who was selling billions of dollars’ worth of U.S. Treasuries …? Who had too much short-term leverage in repurchase agreements? Who was exposed indirectly through their debtors and counterparties?” The Office of Financial Research needs to get busy, Feldberg said.

U.K. ACADEMICS

• “Our current financial structure is designed to fail – and to be bailed out by dramatic central bank action. While there is widespread recognition that this central bank duct tape approach to financial stability is unacceptable, proposals for reform are remarkably inadequate to address the structural problem,” wrote Carolyn Sissoko, senior lecturer in economics at the University of the West of England.

• “The events of March 2020 provide evidence of structural instability in the repo market, and of the problematic nature of a ‘dealer of last resort’ solution,” wrote Sissoko.

THINK-TANKS

• The Fed’s “massive” and “unprecedented” interventions in the financial markets in March did stabilize the financial markets, but reform is needed, said Stanford University professor Darrell Duffie in a Hutchins Center working paper. “Although the Fed accomplished what it needed to do, as a design principle, the lack of a robust private-market structure should not be acceptable based on the notion that the Fed can rescue the market as a last resort,” he wrote. (Italics are his.)

• “There was a flaw in Dodd-Frank,” Janet Yellen told a Brookings Institution event about the 2010 post-financial crisis law intended to fix vulnerabilities in the financial markets. “We need a new Dodd-Frank.” Former chair of the Federal Reserve Board, Yellen this year agreed to be President Biden’s Treasury Secretary. She wants more regulation of nonbanks.

• Turmoil in the financial markets in March revealed fundamental flaws in the enormous and growing U.S. bond markets, wrote Nellie Liang and Pat Parkinson in “Enhancing Liquidity of the U.S. Treasury Market Under Stress,” a Hutchins Center Working Paper. “Absent significant changes to improve the supply of liquidity in stress, we are concerned that large-scale ad hoc interventions by the Federal Reserve with its associated costs will become more frequent in the future.”

• The broker-dealer market has become increasingly concentrated, and all of the very largest dealers are now affiliates of global systemically important banks. That the liquidity of these enormous (U.S. bond) markets is dependent on such a small set of such dealers raises concerns regarding market efficiency and financial stability,” said Liang and Parkinson in their Hutchins Center Working Paper.

MEDIA

• Repo is “dodgy financial plumbing” that “has the capacity to cause an almighty mess” and needs to be fixed, The Economist wrote.

What to do about it

Solutions debated during the year fell into two camps: Eliminate shadow banking or embrace it.

The loudest proponents for elimination said:   Bring back the stable financial markets that existed for 65 years, 1933-1998, after the passage of the Glass-Steagall Banking Act of 1933.

During that time the U.S. financial system was decentralized into three separate sectors: (1) Commercial banks took deposits, whose safety was insured by the FDIC; they made loans; and they offered a wealth management service to clients. (2) Securities firms underwrote debt and equity securities that provided longer-term financing to businesses. (3) Insurance companies protected people and businesses from risk.

Without the discipline of this framework, banking will inevitably be distorted by the pressure for profits and it will be vulnerable to panics, said proponents.

This approach is perhaps best presented by Taming the Megabanks by Arthur E. Wilmarth, Jr., Oxford University Press, 2020, and The Money Problem by Morgan Ricks, The University of Chicago Press, 2016.

Some experts recommend four key changes.

Bring back Glass-Steagall and get rid of Too Big To Fail:  Reinstate the (repealed portions of) the Glass-Steagall act and the Bank Holding Company Act of 1956, and undo key deregulation provisions in legislation like the Federal Deposit Insurance Corporation Improvement Act of 1991 and the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.

Get rid of shadow banking panics: Define “deposits” in Section 21 of the Glass-Steagall act to include modern “deposits” like repos, commercial paper and money market fund financing, or anything with a maturity of less than one year. Then these will have to move out of nonbanks and become FDIC-insured deposits in the regulated banking system. FDIC insurance, unlimited and paid for by bankers not taxpayers, would refund depositors when banks fail, as it did in the 2008 financial crisis. 

As for nonbank financial firms, they would once again finance themselves by selling stock or bonds or getting a bank loan, which worked fine through decades of U.S. prosperity. Securitization would happen here. Nonbanks could sell securities to investors, but investors could not use the securities as collateral to get loans for less than one year.

Stop repo fire sales: Eliminate the bankruptcy safe harbor that repos enjoy.

Regulate nonbanks: Strengthen the power of the Financial Stability Oversight Council, created by Dodd-Frank, to identify and regulate nonbanks.

But critics of eliminating shadow banking say it’s essential to modern financial markets, and in 2020 the momentum was behind the push to embrace it. Some examples:

Dealer of last resort: The Fed would set a price on some securities and stand ready to buy at that price, so traders know they have a buyer and won’t panic. Supporters note the Fed did this in March 2020 and it worked. Critics say it’s hard to understand the ramifications of such huge bailouts.

Central clearing: All trades involving U.S. Treasuries, whether cash or repo, would go through a central counterparty. Supporters claim this will permit much larger trading volume before the Fed has to step in as the lender/buyer of last resort. Critics wonder if a central counterparty can handle enough volume in a crisis, and they worry that it concentrates risk.

A standing repo facility: The Fed would make repo loans reliably available to banks and nonbanks, with rules and collateral type to be determined. Supporters say this will keep credit flowing in a crisis and reduce the “dash for cash.” Critics say it will encourage financial institutions to take on more risk, because they know that in an emergency they can readily get cash from the Fed.

Capital requirements: Regulators would strategically ease regulations that say banks can’t lend more unless bank owners take on more of the risk. Supporters say this easing would let banks do more helpful lending in a crisis. Critics say banks were stable last year exactly because these regulations were put in place after the last financial crisis in 2008.

Transparency: Increase data collection and disclosure to improve transparency, especially for bilateral uncleared repo.  Supporters say regulators are flying blind. Critics say this reveals proprietary information, it’s too expensive to implement and financial firms already have to make too many disclosures.

One example of the embrace approach is “Enhancing Liquidity of the U.S. Treasury Market Under Stress” by Nellie Liang and Pat Parkinson, a Hutchins Center Working Paper, December 16, 2020.

Global regulators say shadow banking is needed to “reveal clear price signals … allow a diverse investor base to channel funds efficiently … and help transfer risk to parties willing and able to bear them.” Critics argue these benefits to Wall Street are outweighed by the price Main Street pays when shadow banking collapses.

On all sides, concern focused on excessive use of short-term debt financing by key shadow markets and shadow bankers like money market funds, hedge funds, mortgage bankers, foreign investors, open-end mutual funds, the corporate bond market, leveraged loans and the CLO market, the residential mortgage market and other consumer lending markets, the commercial mortgage market, and the municipal securities market.

A year’s worth of news

Following is Breaking News posted at RepoWatch in 2020.

January 2020: Nonbanks currently originate and service about half of all U.S. mortgage loans, up from 10 percent and 6 percent respectively 10 years ago, said the Financial Stability Oversight Council in its annual report. Their financing is mainly runable short-term warehouse repo lines, often with banks, with risky contract terms. Their loans make up a big share of federal securitizations: Ginnie Mae 85 percent, Fannie Mae 60 percent and Freddie Mac 53 percent. The largest nonbanks have four times as much debt as equity, and most of that debt is runable.
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January 2020: Risk in the repo market is still a concern, said the Financial Stability Oversight Council in its annual report. Tri-party repo is now concentrated in the hands of one middleman, the Bank of New York Mellon. We still don’t know much about bilateral repo, a blindness that needs to be “improved considerably.” It took three years after the FSOC recommended it, but the Office of Financial Research finally began collecting data on centrally cleared repo transactions in October 2019 (Editor’s note: How hard can that be, given that the only central clearinghouse, Depository Trust & Clearing Corp., has all that information?)
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January 15, 2020: Sponsored repo almost doubled in December, hitting a new monthly record of $276 billion, and likely was a key reason for repo stability at year-end, wrote reporter Stephen Spratt for Bloomberg. In sponsored repo, a clearing house in the middle of the trade lets institutions net their deals and thereby do more of them.
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January 17, 2020: Giant banks unable to use their illiquid mortgages as collateral for short-term loans on the repurchase market are instead using many of them as collateral for loans from Federal Home Loan Banks, which carry an implicit taxpayer guarantee and get much of their money by borrowing short term, especially from money market funds, write two Columbia University economists.
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January 19 2020: Non-banks that pose risk to financial markets because they borrow short and lend long, often on the repurchase market, had slower growth in 2018, at 1.7%, than their 2012-2017 average of 8.5% and now represent 13.6% of total global financial assets, the Financial Stability Board reported. The U.S. was their main home at 29.9%, though that has declined since 2014 while China and Ireland grew. Next in size were Europe, China, the Cayman Islands and Japan, in that order. Since the financial crisis, investment funds have been the main driver of growth, while pre-crisis growth was largely driven by special purpose vehicles and broker-dealers supported by banks.
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January 28, 2020: Foreign banks increasingly dominate the borrowing side of the repurchase market, with foreign repo counterparties making up about 65 percent of the top five counterparties, J.P. Morgan Securities’ Teresa Ho told Crane Data’s Money Fund University conference.
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January 28, 2020: Depository Trust & Clearing Corp., which runs the only clearing house for repurchase transactions outside of the tri-party market, told Bloomberg reporter Liz McCormick that their “sponsored repo” program – which lets members sponsor non-members like hedge funds to do repo trades – was not the cause for repo’s recent interest rate volatility and, instead, makes more cash available to lend. But critics have said sponsored repo’s concentration in overnight deals caused a shortage of lenders and soaring rates.
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February 2020: Large bank losses after the financial crisis were largely due to “improper business practices in large banks that occurred in the run-up to the crisis but were recognized only later,” according to a working paper from the Bank for International Settlements. The authors find that such losses are larger following credit booms, easy-money central-bank policies and “improper business practices … with mis-selling of mortgage-backed securities in the mid-2000s being a prime example,” especially in North America. Better regulation and supervision can reduce losses, they find.
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February 5, 2020: Mortgage giants Freddie Mac and Fannie Mae will soon stop accepting mortgages tied to the London interbank offered rate, which has been the preferred rate for decades, and start accepting mortgages tied to the cost of overnight repos, the companies announced. One result may be to bring the mysterious repo market more into the mainstream.
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February 11, 2020: Because of relentless bank lobbying, the U.S. dangerously lags other nations in implementing Basel III bank regulations set after the financial crisis, warned the head of the Basel Committee on Banking Supervision. The delays, two years past Basel deadlines in some cases, include regulations to prevent heavy short-term borrowings like repo and new ways to treat securitizations.
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February 19, 2020: The five banks with the highest levels of short-term wholesale funding in the third quarter of 2019 were Barclays US, Deutsche Bank US, Morgan Stanley, Goldman Sachs and HSBC North America, according to the Bank Systemic Risk Monitor created by the U.S. Treasury’s Office of Financial Research.
*****
February 25, 2020: After discussions with regulators, major repo trader JP Morgan Chase is going to put another $50-60 billion into repo lending to help insure there’s enough money in the market to meet demand, Reuters reported.
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February 26, 2020: Prime borrowers, not subprime borrowers, drove the pre-crisis housing boom and fraudulent borrowing, according to a Liberty Street Economics report.
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March 12, 2020: The Fed’s decision Thursday to offer up to $1.5 trillion in repo loans to keep cash flowing on that market is not a bailout or gift to stock investors as some critics suggest, Slate reported. “The key thing to realize is that if the repo market seizes up for some reason, much of the financial system ceases to function…. This is all short-term lending against the safest collateral in the world, U.S. government securities. Nobody is just being given money for keeps.”
*****
March 12, 2020: The underlying cause of the current economic slowdown is fundamentally different from that of the Great Recession, wrote Louise Sheiner with the Brookings Institute. The Great Recession was a result of financial “imbalances.” This round is totally external to the financial markets, she said.
*****
March 16, 2020: Sponsored repo, where borrower meets lender at the Fixed Income Clearing Corporation, with a dealer on the sidelines “sponsoring” the borrower if anything goes wrong but not showing the obligation on its books, shows that post-crisis regulation is unravelling and risk is rising, wrote N. Orian Peer in “Repo in the Time of Corona” posted on the Just Money website.
*****
March 25, 2020: Post-financial crisis regulations have made banks much more fit to face the COVID-19 panic and should not be eased, said Zoltan Pozsar of Credit Suisse and Perry Mehrling of the Frederick S. Pardee School of Global Studies, in conversation with Bloomberg reporters Tracy Alloway and Joe Weisenthal. They also said the “jaw-dropping” performance of the dollar in recent weeks is the purest illustration of the world’s dependence on the dollar, and the COVID-19 crisis may make the world a more fractured place: manufacturing won’t be mostly done in one country, more financing will be done locally, we’ll be less collective and global, and we may cap stock buybacks.
*****
March 25, 2020: The last two weeks in the financial markets have been a “dash for cash,” said Zoltan Pozsar of Credit Suisse and Perry Mehrling of the Frederick S. Pardee School of Global Studies, in conversation with Bloomberg reporters Tracy Alloway and Joe Weisenthal. The Fed abandoned its efforts to get cash indirectly into the financial markets by buying U.S. Treasuries from dealers short term on the repurchase market and instead began buying U.S. Treasuries outright. “The Fed has done a heroic job,” Pozsar said.
*****
March 28, 2020: So far, unlike in the financial crisis, bank repo lenders seem to be holding off demanding more mortgage collateral, or selling the collateral they have, from REIT investors or mortgage lenders, said the Wall Street Journal. Perhaps the Fed’s dramatic new lending is working, and perhaps banks learned a decade ago that fire sales of collateral when no one has money to buy can backfire on the bank.
*****
March 29, 2020: Repo strain has eased because the Fed is now buying unlimited U.S. Treasuries from the primary dealers, said the Great Recession blogger David Haggith at Seeking Alpha. Dealers had no spare cash to make repo loans because they were drowning in the flood of U.S. Treasuries they’re required to buy from the federal government. Especially they didn’t want repo loans collateralized with old U.S. Treasuries that were probably also being used as collateral for other deals – in other words, rehypothecated. Primary dealers now have their cash shortage eased by selling U.S. Treasuries to the Fed.
*****
March 30, 2020: The Fed has been pouring cash into the repo market, mainly buying U.S. Treasuries from the primary dealers. Overnight repo was up 10 percent the first three weeks of March, and total repo was up 14 percent, to the highest level since Dec. 17, 2008. But with the Fed now buying Treasuries outright instead of over the repurchase market, RepoWatch wonders if repo volumes will fall in the next report Thursday. The good news in the current repo volatility is that so much of the collateral is U.S. Treasuries, not mortgages.
*****
March 30, 2020: Investors who used their mortgage securities as collateral for a repo loan want the Fed to buy mortgages to keep values up, so repo lenders won’t demand more collateral when the value of those mortgages falls. Meanwhile, the repo lenders do not want the value of mortgage securities to rise because they will then have to put up more collateral for the hedges they use to offset mortgage price risk. Got that? asks Bloomberg columnist Matt Levine.
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April 2020: Loans from large banks to U.S nonbanks has nearly doubled since 2013, to more than $1.4 trillion, not counting hidden transactions, reported the Bank for International Settlements in their working paper “Post-crisis international financial regulatory reforms: a primer.” Yet there is no international regulation of asset management fund risk, such as borrowing short and lending long, they report.
*****
April 1, 2020: To keep credit flowing in spite of COVID-19, the Fed made it a lot easier for major U.S. banks to lend, undoing an important post-crisis regulation, the supplementary leverage ratio, that banks have complained about for years. Regarding bank lending, “it’s as if most of the major legislation of the last ten years has disappeared in a flash,” and J.P. Morgan, Bank of America and Wells Fargo will be among the major beneficiaries, said Josh Galper at Securities Finance Monitor.
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April 2, 2020: The Fed has set up a special repurchase market where other central banks can sell their U.S. Treasuries for dollars. Some countries have been selling large volumes of Treasuries in the open market, driving down prices and potentially causing instability, reported Stephen Spratt and Liz Capo McCormick for Bloomberg.
*****
April 2, 2020: A surge of repurchase settlement failures hit the repo market in the last three weeks of March, according to data on primary dealer transactions released by the New York Fed. Failure by borrower or lender to deliver securities as promised was up 157 percent compared to the three prior weeks and 154 percent compared to the same period in 2019. By far the most likely collateral to fail to settle was U.S. Treasuries, suggesting demand for safe collateral is exceeding supply.
*****
April 8, 2020: Outstanding European repo at year-end 2019 was up 2.1 percent for the year, when comparing same reporting institutions, reported the European Repo and Collateral Council in its annual survey. Counting all reporting institutions, European repo volume was $9.1 trillion, compared to U.S. primary dealer volume of $5.2 trillion, thought to represent 80-90 percent of the U.S. market.
*****
April 8, 2020: “In my twenty years as Chair of the ICMA ERCC Committee, I have experienced some unprecedented events and extreme market turbulence. The one consistent observation during all of these challenging events was that the repo market not only continued to function but, in many respects, it was what helped to keep markets open, banks lending, and the real economy operating,” said Godfried de Vidts, a senior advisor with the International Capital Markets Association. (Editor’s Note: ICMA has consistently ignored the repo problems 2007-2009.)
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April 8, 2020: “March was a hideous month for the mortgage real estate investment trust (REIT) sector,” writes Brent Nyitray for The Motley Fool. Most mortgage REITs buy mortgage securities with a repo loan. As the value of the securities falls, the repo lender demands more collateral. Over the past several weeks, this has been forcing REITs into fire sales of securities to raise cash.
*****
April 8, 2020: The European Repo and Collateral Council of the International Capital Markets Association has posted five webinars at icmagroup.org that cover upcoming regulations, legal updates, the latest European repo survey and ICMA’s effort to develop a way to standardize and automate repo transactions.
*****
April 9, 2020: Repo volume subsided to more common levels in the week ended April 2 but fails continued elevated, primary dealers reported.
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April 13, 2020: Many nonbank mortgage lenders will not survive when homeowners don’t make mortgage payments during the COVID-19 crisis, and the federal government will have to bail them out to save the giant banks that finance them, said Berkeley Haas professor Nancy Wallace. “Solutions are going to have to involve trillions of dollars. It could be the bailout of all bailouts,” Wallace said.
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April 22, 2020: Wall Street quants at the giant French bank Societe Generale SA are developing a new trading strategy based on equity repo (repo collateralized with stocks) that the bank touts as safe because it’s become clear central banks will do whatever it takes to keep the repurchase market from seizing up, reported Bloomberg.
*****
April 29, 2020: None of the 34 global systemically important banks, including the eight in the U.S., are fully compliant with Basel 239, the January 2013 regulation meant to compel banks to improve their data and risk reports, according to the Basel Committee on Banking Supervision.
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May 2020: When the Fed decided that U.S. banks can exempt U.S. Treasuries from their Supplementary Leverage Ratio calculation, they freed up crisis funding for the financial markets but run the risk of fueling a bubble later this year, wrote editor Josh Galper in the May issue of Securities Finance Monitor. They also gave banks with large holdings of Treasuries “a sizable advantage over their competitors” in money available for trading, Galper said.
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May 2020: It’s reasonable to expect that the Fed’s decision last month to let banks exempt U.S. Treasuries from a key post-crisis regulation, the Supplementary Leverage Ratio, through March – a change long pushed by securities traders – could become permanent “depending on the results of the 2020 US Presidential election,” wrote editor Josh Galper in the May issue of Securities Finance Monitor.
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May 2020: Unprecedented Federal Reserve Board actions to support the economy during the COVID-19 crisis mean that the Fed “effectively owns” the giant market for trading Treasuries, wrote editor Josh Galper in the May issue of Securities Finance Monitor.
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May 11, 2020: Central counterparties have issued large margin calls during the COVID-19 crisis, stressing members and the larger trading community because financial institutions are interconnected. Some central counterparties are active in the repo market, for instance at end-2019 ICE Group had around $12.5 billion in mostly reverse repos at commercial banks, said a Bank for International Settlements Bulletin “The CCP-bank nexus in the time of Covid-19.”
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May 11, 2020: The world of cleared derivatives and repos is highly concentrated and vulnerable to systemic shock, said a Bank for International Settlements Bulletin “The CCP-bank nexus in the time of Covid-19.” For example, just one central counterparty handles more than 90% of cleared interest-rate derivatives, another handles more than 90% of cleared credit derivatives, and the five largest clearing banks together account for more than half of all derivatives positions at central counterparties, summarized International Financing Review.
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May 12, 2020: For the second time in 12 years, the Fed has had to prop up Prime money market funds because runs by their investors forced the funds to stop providing key unsecured financing for banks and switch to short term secured investments like repos. This signals that post financial crisis reforms may not be adequate, said the Bank for International Settlements in “US dollar funding markets during the Covid-19crisis – the money market fund turmoil.”
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May 12, 2020: In April taxable money market funds dramatically increased their holdings of Treasury securities by $796 billion and reduced their repos by $238 billion, after growth in both segments in February and March, reported Crane Data.
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May 12, 2020: Asset managers like hedge funds don’t need or want the obligations that go along with being primary dealers, who are legally obligated to make markets for the New York Fed and bid in all Treasury auctions at “reasonably competitive prices.” That’s the opinion of Securities Finance Monitor editor Josh Galper, responding to suggestions that a shortage of repo cash during crises could be resolved by letting asset managers into the game.
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June 2020: The Fed’s “massive” “unprecedented” interventions in the financial markets in March did stabilize the financial markets, but reform is needed, said Stanford University professor Darrell Duffie in a Hutchins Center working paper. “Although the Fed accomplished what it needed to do, as a design principle, the lack of a robust private-market structure should not be acceptable based on the notion that the Fed can rescue the market as a last resort,” he wrote. (Italics are his.)

June 3, 2020: The U.S. is driving its market-based finance worldwide, built around securitization, repo and collateral and requiring government to step in during times of risk, wrote Professor Daniela Gabor at the University of the West of England in Finance and Society.
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June 24, 2020: European securities financing transactions, including repo, could become a lot more transparent, and easier to analyze and track, when the European Securities Financing Transactions Regulation is phased in from July 13 to January 11. All participants must report details of their transactions to “a registered or recognized trade repository,” and some are choosing The Depository Trust & Clearing Corporation, the firm announced.
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June 25, 2020: As Africa hurdles toward a full recession, it needs a repurchase market to attract investors and reduce interest rates and borrowing costs, “a special purpose vehicle modelled on the repurchase ‘repo’ facilities commonly used by central banks such as the US Federal Reserve to help support the smooth functioning of markets,” wrote UN under-secretary general Vera Songwe in the Financial Times.
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July 2020: COVID-19 exposed the systemic fragility of investment funds such as mutual funds and exchange traded funds that invest in illiquid assets like corporate bonds but let their investors withdraw at will. The Fed had to take massive steps unprecedented in its history to stabilize these funds, which “should not be expected to become the norm,” wrote economists from The Federal Reserve, The Wharton School and the University of Chicago in “Financial Fragility in the COID-19 Crisis.”
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July 9, 2020: In the week ended July 8, banks did not participate in Fed repurchase transactions for the first time in 10 months, reported Reuters.
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July 14, 2020: In mid-March investors ran on prime money market funds, which are key repo lenders, repeating similar runs that decimated financial markets in 2008 and once again forcing a massive intervention by the Fed. Within two weeks $96 billion, or about 30% of assets under management, were withdrawn, reported Federal Reserve economists. The runs appear to have been made worse by reforms imposed after the financial crisis, the economists said.
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July 15, 2020: Nonbank financial firms, or shadow banks, were a big reason the Fed had to intervene dramatically in the financial markets in March, according to Federal Reserve Vice Chairman Randal Quarles, as reported by Bloomberg. “It’s more important than ever” to understand the possible threats of the largely unregulated industry, he said. “Such measures should not be required.”
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July 20, 2020: “The financial system has turned credit intermediation into a debt mint that produces assets to enrich investors but leaves households, firms, and governments struggling with unsustainable liabilities,” writes Katharina Pistor in Project Syndicate.
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July 20, 2020: The European Central Bank has added Serbia and Albania to its network of euro-denominated repos, designed to supply euro liquidity in case of further market stresses due to Covid-19, reported Central Banking.
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July 23, 2020: Twice in 11 years the risks hidden at lightly regulated financial firms like hedge funds and money market mutual funds have forced the Federal Reserve to launch gigantic interventions in the financial markets. “There was a flaw in Dodd-Frank,” former Fed chairperson Janet Yellen told a Brookings Institute event moderated by the New York Times about the post-financial crisis law intended to fix vulnerabilities in the financial markets. It tightened regulations on banks but mostly ignored nonbanks.
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July 24, 2020 Three major U.S. pension plans are seeking members worldwide for their new Global Peer Financing Association set up to increase and encourage peer-to-peer trading activity in the securities lending and repo markets for the benefit of asset owners, reported International Publishers in London. The idea is to increase revenue and improve liquidity.
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August 2020: The repo volatility between late February and early April 2020, first triggered by liquidity evaporation for commercial mortgage-backed securities and REITS holding agency MBS, was the largest stress event international capital markets have witnessed since the 2007-2009 global financial crisis, but with swift intervention by the Fed the market continued to operate, reported Bank of New York Mellon, the clearing bank for triparty repo.
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August 2020: Shadow banks avoid regulation and still get access to cash flow through connections with regulated banks, which leads them to rely less on cash and deposits for cash flow and more on borrowing short-term funds from the bank, accumulating more risks and strengthening the possibility of contagion, wrote economists Haelim Anderson, Selman Erol and Guillermo Ordoñez.
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August 3, 2020: The repurchase market started to seize up in March over pandemic fears and uncertainty, especially the term market where borrowing and lending is for longer than one day. The situation gradually eased when the Fed increased its repo operations, signaling that it stood ready to keep cash flowing as needed, reported Fed economists.
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August 3, 2020: A clean sweep by Democrats in November will increase the chances that regulators will enact sweeping shadow banking reforms, reported Bloomberg. “We need a new Dodd-Frank,” said former Fed Chair Janet Yellen, who said she’s concerned about money market mutual funds and certain hedge funds and investment funds vulnerable to runs. She would like to see more power in the hands of the Financial Stability Oversight Council, a U.S. Treasury group created by Dodd-Frank to monitor systemic risk.
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August 3, 2020: Following the crisis in the financial markets in March, Fed Vice Chairman for Supervision Randal Quarles who heads the international Financial Stability Board has told the world’s central bankers and finance ministers that he will deliver a report on the crisis by November, including an overall framework for reforming shadow banks, Bloomberg reported.
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August 3, 2020: The Federal Reserve and other central banks have launched a review of what went wrong with the repurchase market in March, focusing on excessive use of debt financing by shadow banks like money market mutual funds, hedge funds and mortgage bankers, reported Bloomberg. Shadow banks have grown dramatically in recent years, from $21.3 trillion in 2002 to $114.3 trillion in 2018.
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August 4, 2020: The value of collateral upon liquidation depends on characteristics of the borrower, not just the collateral itself, reported European Central Bank economists in Liquidation Value and Loan Pricing: Evidence From Repo Markets. The 2008 run on repo revealed a similar phenomenon.
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August 12, 2020: U.S. money market fund reforms 2014-2016 appear to have made prime money market funds more, not less, vulnerable to runs, so “it is not clear if the reform has made institutional prime MMFs more stable than before,” write two Finish economists at Aalto University School of Business in Investor monitoring, money-likeness and stability of money market funds.
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August 21, 2020: The crucial change in money markets over the 1990s and 2000s was the replacement of the Federal Funds unsecured core money market with the collateralized repo market, and this change raises important issues, wrote Carolyn Sissoko, senior lecturer in economics at the University of the West of England.
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August 21, 2020: “Our current financial structure is designed to fail – and to be bailed out by dramatic central bank action. While there is widespread recognition that this central bank duct tape approach to financial stability is unacceptable, proposals for reform are remarkably inadequate to address the structural problem,” wrote Carolyn Sissoko, senior lecturer in economics at the University of the West of England.
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September 2, 2020: The Fed’s preferred alternative to the discredited LIBOR interest rate, the Secured Overnight Financing Rate, doesn’t work, won’t be adopted by key players, and needs to be replaced, wrote commentator Christopher Whalen in the National Mortgage News.
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September 3, 2020: China is opening its doors for international financial institutions to access its securities markets – Citi, BlackRock and JP Morgan are among those lining up – and though repo and securities financing haven’t been specifically mentioned yet, surely they’re on bankers’ minds with China onshore repo estimated at $1.7 trillion, wrote editor Josh Galper at Securities Finance Monitor. Chinese bonds as collateral for global repo transactions and over-the-counter derivatives could be a major growth opportunity, Galper said.
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September 3, 2020: “Volume of repo transactions in Azerbaijan up five-fold” said the Trend News Agency headline.
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September 9, 2020: A decade after the Dodd-Frank Act mandated collection and publication of repo data, the Office of Financial Research began publishing a daily report that “provides more detail on overall activity in these markets than any other currently available source,” the office said. Tracked are tri-party repo and repo that is centrally cleared by the Fixed income Clearing Corporation.
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September 14, 2020: Covid-19 financial market turbulence in March revealed fickle funding sources and unstable deals among banks and nonbanks, said a Bank for International Settlements study. For example, banks bought securities from Cayman Island special purpose vehicles with money they borrowed short term via repo or commercial paper from money market funds that suddenly wanted their money back. “… despite reforms, MMFs can still be an unreliable source of funding,” said the BIS study. Or banks lent short term to hedge funds, which were forced into fire sales to meet bank repayment demands during the Covid crisis.
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September 14, 2020: Cross-border connections between banks and nonbanks rose from $4.6 trillion in 2015 to $7.5 trillion in 2020, once again building up the systemic risk that flattened the global economy in 2008 and forced massive Fed intervention at the onset of the COVI-19 pandemic, according to a Bank for International Settlements study. Nonbanks include central counterparties, hedge funds, investment funds, insurance companies, pension funds and others.
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September 15, 2020: Prime money market funds, who are key repo lenders, may be losing favor after turmoil in the market in March forced the Fed to step in and some fund families like Vanguard to close their prime MMF, the Financial Times reported. The crisis was reminiscent of 2008 when prime money market funds were a key cause of the volatility. In response regulators introduced tough new rules, but those rules may have made the problem worse, some economists now believe.
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September 24, 2020: Nonbank lenders accounted for 64.2% of the $760 billion of first-mortgage loans produced by the top 100 lenders, up slightly from the first three months of the year, reported Inside Mortgage Finance. The nonbank share in the second quarter of 2019 was 57.3%.
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September 25, 2020: After the financial crisis, banks were discouraged in many ways from trading for their own profits, or proprietary trading, instead of for clients. But the Bank of England finds proprietary trading is still substantial, though in different departments ostensibly for different purposes. “The old prop desks were risky. Undoubtedly. But at least they were clearly defined,” writes Izabella Kaminska at the Financial Times.
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September 25, 2020: A key reason mortgage refinances are soaring nationwide is a new policy from Fannie Mae and Freddie Mac called the automated appraisal waiver, which means a homeowner who meets certain requirements doesn’t need to get an appraisal to take out a new mortgage. “The result has been nothing short of breathless,” wrote author Danielle DiMartino Booth for Bloomberg News.
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October 2020: Four leading pension plans including the giant California public employees’ retirement system are creating an association to “increase and encourage” peer-to-peer securities lending and repos, reported Securities Finance Monitor. “By transacting with our peers, we have been able to increase revenue generated from our securities lending and repo activities while also expanding sources of liquidity for our plan,” a California pension executive said in a statement.
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October 2020: “China’s securities markets are enormous, at over US$23 trillion in bonds and equities, and so is its repo and securities finance business. New rules allowing international firms to apply for mutual fund and securities services licenses mean that major Western players now have a means of access,” reported Securities Finance Monitor.
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October 2020: The U.S. financial system is interconnected, volatile and dependent on trillions of dollars from the Federal Reserve to survive a crisis, according to the Securities & Exchange Commission in an 83-page recounting of the Covid-19 financial collapse.
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October 2, 2020: “Epic” issuance of mortgage-backed securities in the second quarter of 2020 pushed securitization rates to their highest levels since 2013, reported Inside Mortgage Finance.
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October 19, 2020: The Central Bank of Iran says it has conducted the first repurchase agreement operation, agreeing to lenders’ requests for short-term credit worth 8.9 trillion rials ($30 million), marking the first operation of its kind in the bank’s history. The repo operation was conducted at 22%, reported the Financial Tribune in Tehran.
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October 26, 2020: The Fed is probably going to closely consider setting up a standing repo facility so people know there’s a place they can take their treasuries or agency mortgage-backed securities and get money, former New York Fed President Bill Dudley told Yahoo!finance. The problems in March and April seem to have been caused by a shortage of lenders, and only the Fed has the capacity to expand when needed, he said.
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October 30, 2020: The Fed’s response to rising repo rates has been to buy bank assets to give banks cash to lend and bring down those rates. In this way, the Fed “seems prepared to keep encouraging a debt binge,” wrote Miles Ruttan with Bytown Capital in FXStreet, which covers the foreign exchange markets. But “history teaches us – human excesses and indulgence will always reach a limit” and “eventually, we are likely to build up too much stress on the financial system for this cycle to continue without some type of cataclysmic event,” he wrote.
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November 2020: Nonbank financial institutions and short-term borrowing were at the heart of the March turmoil, said the Federal Reserve’s Financial Stability Report. This included hedge funds, mREITS, prime money market funds and fixed-income mutual funds. “Going forward, regulatory agencies, including the Federal Reserve, are exploring reforms that will address structural vulnerabilities in the nonbank financial institutions sector that have required emergency interventions during both the 2007–09 financial crisis and the COVID-19 crisis.”
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November 2, 2020: Australia has bulked up its repo operations to keep cash flowing in its financial markets and lenders have widened the pool of assets they will accept as collateral including more corporate securities, reported RBC Dominion Securities.
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November 3, 2020: Green bonds may now be used as general collateral in the Green Bond GC Basket offered by Eurex Repo, a key marketplace for repo financing, reported Securities Lending Times.
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November 7, 2020: The U.S. Treasuries flooding the market to raise money for the federal government is overwhelming the primary dealers, who have to buy the Treasuries and then don’t have the money to finance the repurchase market, which then causes repo rates to rise, which then forces trillions of dollars in unexpected contract payments and a freezing of the financial markets. Replace primary dealers with a central clearing house and replace the repo market with a standing repo facility where the Fed would lend to anyone with Treasuries for collateral, wrote The Economist. The alternative is “an almighty mess,” they said.
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November 12, 2020: The average securities finance trade is open for 92 days and has 210 reportable events over its lifetime, each of which can cost money. Some firms are looking into artificial intelligence, machine learning and robotics process automation to improve operations, wrote Phil Morgan, CEO at Pirum Systems for Securities Finance Monitor.
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November 19, 2020: The cause of repo volatility in March was “government debt issuance that fewer investors actually want to buy,” wrote Josh Galper at Securities Finance Monitor. When traders panicked and tried to raise cash by selling Treasuries, they couldn’t find buyers. The solution, said Galper, is for the Fed to keep buying lots of Treasuries, or for the government to stop issuing them, “but that seems mightily unrealistic – for now,” Galper said.
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November 25, 2020: A day in the life of the repurchase market. China’s short-term rates sink as rumors swirl of government support (Reuters). Short-term rates crash in India with funds overflowing with cash (Yahoo!finance). Sweden’s central bank surprised markets with a bigger-than-expected expansion of its quantitative easing program and said the repo rate was kept at zero where it will probably stay in “the coming years” (Bloomberg).
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November 26, 2020: Federal regulators have recently taken several steps toward letting private businesses own FDIC-insured banks, a move that has had disastrous consequences when tried in the past, wrote Art Wilmarth in Fortune. Instead, Congress should reinstate the Glass-Steagall Act and it should prohibit nonbanks from offering short-term financial instruments like money market mutual funds, commercial paper, and repos.
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November 27, 2020: Ghana is accelerating its repo market development, according to a webinar by the International Capital Markets Association and reported by Securities Finance Monitor.
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November 27, 2020: Since the beginning of 2019, large UK banking groups have been required to separate, or “ring-fence,” their retail banking from their investment banking. The result has been that all deposits are in the retail bank, leading to more and cheaper mortgage lending – because deposits are a low-cost source of funds – and less investment banking services to corporations, said staff at the Bank of England in their blog Bank Underground.
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December 2020: Bank losses caused by contagion, or connections with other financial institutions, are mainly caused by fire sales of assets, not by interbank exposures or overlapping portfolios, wrote analysts for the Bank for International Settlements, the Bank of England and the European Central Bank. Regulators need to pay more attention to the fire-sale problem in stress tests, the analysts said.
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December 3, 2020: “Recent events, including the financial fallout from the pandemic, have confirmed that potentially significant structural vulnerabilities remain in the short-term wholesale funding markets,” the Financial Stability Oversight Council warned late last week in its final annual report.
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December 4, 2020: Investors’ thirst for mortgages that don’t meet federal lending standards and for that reason have a higher interest rate than a conventional mortgage, so-called non-Qualified Mortgages, is “red hot,” reported Inside Mortgage Finance. “It comes down to this: a 5% non-QM, though comparatively risky, is better than a 10-year Treasury yielding 95 basis points.” The rate of delinquency and modification on the non-QM loans was 11.9% at the end of October, down from 13.5% in September, according to dv01, an analytics firm, said IMF.
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December 4, 2020: The March meltdown showed we still don’t collect the data we need to spot risk in the repurchase and securities lending markets, wrote Greg Feldberg, Research Scholar at the Yale School of Management. “Authorities were unable to answer basic questions as markets spun out of control. Who was selling billions of dollars’ worth of U.S. Treasuries …? Who had too much short-term leverage in repurchase agreements? Who was exposed indirectly through their debtors and counterparties?” The Office of Financial Research needs to get busy, Feldberg said.
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December 7, 2020: “As they head out the door, Trump-led financial regulators are warning the incoming Biden team that a little-known yet critical corner of Wall Street is broken,” wrote Matt Eagan for CNN Business. “Their concern centers on the short-term funding market, which provides money to businesses, local governments and market players. When this market breaks down, the entire economy can screech to a halt.”
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December 7, 2020: “Our short-term markets don’t seem to be able to function without a very significant government backstop. We need to fix it,” said Jeremy Kress, a University of Michigan professor who researches financial regulation, according to CNN business reporter Matt Egan.
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December 10, 2020: Traders are said to be making repo loans against “green” collateral, but business is just a trickle, in part because participants don’t agree on what “green” is, reported Securities Finance Monitor.
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December 10, 2020: “The repo market blew up in 2008 during the last financial crisis and required a Fed bailout. It blew up again on September 17, 2019 for reasons that have yet to be credibly explained and required at least $9 trillion in cumulative emergency loans from the Federal Reserve over the next six months,” wrote Pam and Russ Martens at Wall Street on Parade.
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December 11, 2020: “There is now clamoring among the crybabies on Wall Street that the Fed should increase its asset purchases, and they’re pressuring the Fed to announce a big increase at the next meeting, because, I mean, how else are markets going to keep on going up?” wrote Wolf Richter for Wolf Street.
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December 12, 2020: JP Morgan said it will be transacting intraday repo on blockchain, reported Ledger Insights. Broadridge, which processes repo transactions for 19 of the 24 primary dealers in the U.S., first piloted its blockchain repo platform in 2017 and uses it for intraday, overnight and term treasury repos, both bilateral and intracompany, Ledger Insights said.
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December 14, 2020: Seven banking and credit union associations oppose the Figure Technologies application to the Office of the Comptroller of the Currency, which regulates national banks, to start a national bank that takes deposits without having to buy Federal Deposit Insurance Corp. insurance, wrote Pam and Russ Martens in their blog Wall Street on Parade. “The lack of federal deposit insurance triggered the bank runs and banks collapses that played a key role in ushering in the Great Depression,” they said.
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December 15, 2020: Repo markets have gained in significance in emerging market economies, though they’re usually small, often below 5 percent of gross domestic product, and the market for securitized assets is “still in a nascent stage” though growing strong in a few countries, reported the Bank for International Settlements.
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December 16, 2020: Nonbank financial institutions have grown faster than banks over the past decade and in 2019 accounted for 49.5% of the global financial system, compared to 42% in 2008, reported the Financial Stability Board in its annual report on nonbank financial institutions. In another notable finding, researchers said loan provision by non-bank entities dependent on short-term funding has increased significantly faster in emerging market economies than in advanced economies.
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December 16, 2020: The broker-dealer market has become increasingly concentrated, and all of the very largest dealers are now affiliates of global systemically important banks. That the liquidity of these enormous (U.S. bond) markets is dependent on such a small set of such dealers raises concerns regarding market efficiency and financial stability,” said Nellie Liang and Pat Parkinson in “Enhancing Liquidity of the U.S. Treasury Market Under Stress,” a Hutchins Center Working Paper.
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December 16, 2020: Turmoil in the financial markets in March revealed fundamental flaws in the enormous and growing U.S. bond markets, wrote Nellie Liang and Pat Parkinson in “Enhancing Liquidity of the U.S. Treasury Market Under Stress,” a Hutchins Center Working Paper. “Absent significant changes to improve the supply of liquidity in stress, we are concerned that large-scale ad hoc interventions by the Federal Reserve with its associated costs will become more frequent in the future.”
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December 21, 2020: While US repo markets are looking at a calm end of year, policy makers want to avoid a repeat of liquidity constraints in September 2019 and March 2020. There’s a repeated chorus that US repo markets are broken, writes Securities Finance Monitor.

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