Last year was a dud. But this year has started with a bang.
Those of you with the patience to wade through the 2022 calendar of Breaking News items below – taken from my daily posts at RepoWatch.org – will see a year like all the others since 2008: lots of warnings about the repurchase market and few steps taken to reduce the risks.
Big talk, little do, as my father used to say.
But that all changed January 5, 2023, when the Office of Financial Research, created by the Dodd-Frank Act in 2010, proposed a rule that would require about 40 major firms, including the Fed’s primary dealers, to submit 33 data elements daily – including haircuts and rates – on …. wait for it …. drumroll, please …. their non-centrally cleared bilateral repo transactions.
Can you believe it?
Fifteen years after the repurchase market nearly collapsed the world financial markets, someone finally wants to bring transparency to repo’s darkest corner?
“This initiative to provide better visibility into this opaque financial market segment is vital to helping ensure financial stability,” said James Martin, deputy director of operations, in a press release. Public comment will be accepted for 60 days.
Non-centrally cleared bilateral repo are thought to be 60% of all repo lending by primary dealers and 37% of all repo borrowing by primary dealers. These dealers, who are financial firms selected to trade with the Federal Reserve, are critical players in the financial markets.
The proposed new rule comes at a good time ….. 11 months after the New York Fed inexplicably stopped publishing total primary dealer repo volumes each week. That was the only source of information that got close to total U.S. repo volumes, and the report of totals suddenly disappeared.
I complained loudly to the Fed, because I use that data for RepoWatch’s “Watching for the next bubble” chart.
“So sorry,” a Fed spokesperson told me, without explanation. “Truly sorry for the inconvenience.” And, “We’re actually trying to provide more data and transparency about these markets and activities.”
Big talk, little do.
The transparency that the Office of Financial Research seeks could be a gamechanger. Analysts and traders could then get to work dissecting the data, and regulators might be able to propose ways to reduce risk based on facts, not guesses.
That would be a welcome 180-degree pivot from 2022, when an unreformed repurchase market left repo-watchers holding their breaths as the Fed raised interest rates to fight inflation.
When interest rates rise, the value of repo collateral often declines and repo lenders demand more collateral, even if the collateral they already hold is super-safe U.S. Treasuries. That can force repo borrowers to find more collateral, or lose the loan and face financial ruin.
When repo lenders withdraw loans, that’s called a run on repo, just like depositors withdrawing money from banks is called a run on banks. Runs can spread and bring down entire financial markets. In 2008 a run on repo was at the heart of the economic collapse.
To prevent these and other problems while it fights inflation, the Fed has become everyone’s favorite repo partner.
- Need cash? Primary dealers and approved banks can sell securities to the Fed’s new standing repo facilities.
- Need a safe place to invest? Primary dealers, money market funds, banks and government-sponsored enterprises like Freddie and Fannie can park cash with the Fed’s standing reverse repo facility.
This has inspired some critics to call this Fed “a money market maker of first resort” rather than a traditional lender of last resort. Some ask tough questions like:
- If banks and non-banks think that in a pinch they can always get cash from the Fed, are they making risky investments that could bring on another 2008 crisis and force more bailouts for finance?
- If banks and non-banks are parking their money with the Fed, who’s investing in the economy?
RepoWatch asks: when this crisis is over and before the next one hits, will it finally be time to phase in some of these proven stabilizers?
- Assess FDIC-type premiums for all repo borrowers
- Restore the bankruptcy automatic stay for all repo collateral
- Rule that Section 21 of the Glass-Steagall Act includes repos
- Separate depository and investment banking
Certainly, a review of last year’s news finds lots of hand wringing.
Breaking Repo News 2022
Editor’s Note: The following list of repo news in 2022 comes from the Breaking News that I post daily at repowatch.org. (See 2023 breaking news that I’m posting now.) To make the following items easier to review, I have boldfaced some I find interesting or important. – Mary Fricker, Editor.
January 2022: Although general wisdom says actions by nonbanks like Lehman, AIG, Bear Stearns and money market funds caused the 2008 collapse, analysts said the FDIC brought 3.430 formal enforcement actions against banks 2008-2014, more than after the savings and loan crisis, and recovered $4.4 billion.
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January 2022: Before the mid-1980s, savers lent deposits to banks and banks used that money to make loans to borrowers. But securitization and secured lending like repo has created a market-based financial system, shadow banking, where each dollar from savers flows through about 2.2 middlemen before reaching the borrower, wrote economists Zhiguo He at the University of Chicago and Jian Li at Columbia University.
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January 6, 2022: Higher interest rates can mean bigger profits for repo professionals, wrote Securities Finance Monitor editor Josh Galper. Galper said he would like to see the Fed get out of the repo business so more efficient market pricing can take over, but there’s a shortage of collateral which explains why 31% of U.S. Treasury repo transactions are investors parking cash in the Fed’s Reverse Repo Facility.
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January 11, 2022: We’re seen disruptions to trading in U.S. Treasuries even in benign times such as October 2014 and September 2019, so a big focus of the work the Fed is doing is taking steps to enhance the plumbing and resiliency of the market, said Lorie Logan, executive vice president of the New York Fed in a podcast with David Beckworth. “It’s very unlikely that there’s a standalone solution,” she said.
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January 11, 2022: Quantitative easing prompts healthy firms to increase investment but financially vulnerable (zombie) firms simply restructure debt from short to long terms, said Bank for International Settlements researchers who studied Japanese banks and firms between 2004 and 2015. “Unconventional monetary policy might have a diminishing effect on firm investment in an economy with many zombies,” they concluded.
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January 27, 2022: Financial panics are predictable, according to four economists writing in the Journal of Finance. Rapid credit and asset price growth over the prior three years, whether in the nonfinancial business or the household sector, is associated with a 40% probability of entering a financial crisis within the next three years, Bloomberg reported that Citi
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January 31, 2022: “I continue to be puzzled why anyone would assume that low rates have to be either caused by the Fed or larger (macro)economic trends. Likely reason seems to me to be the dramatic increase in use of collateral in the financial system generating massive demand for ‘safe’ assets,” tweeted economist Carolyn Sissoko.
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February 2022: Intervention by the Fed is most effective if it comes with regulations to prevent re-occurrence, said a Federal Reserve Board staff working paper. Especially effective could be an upfront fee for non-banks that adjusts based on the quality of the non-bank’s reserves, similar to the FDIC deposit insurance fee, as also recommended by the Brookings Institution’s Task Force on Financial Stability report in 2021, the working paper said.
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February 2022: Issues of moral hazard come with massive interventions by a central bank, such as the Fed’s bailout of financial markets early in the pandemic, former Federal Reserve Chairman Ben Bernanke cautioned during a panel discussion hosted by the Yale Program on Financial Stability, “Economic Policy Lessons from Covid-19: The Big Picture.”
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February 2022: Banking crises are not sudden and unpredictable events, wrote economists Cristian Blickle, Markus K. Brunnermeier, and Stephan Luck in a working paper “Who can tell which banks will fail?” Banking crises follow credit booms, and banks know exactly which of them is likely to fail. On the other hand, retail depositors have no idea, which by the way should ease concern that FDIC deposit insurance undermines market discipline.
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February 1, 2022: The hedge fund fixed-income trade that blew up the repo market in September 2019 and March 2020, and Long-Term Capital Management 21 years earlier, is poised to make a comeback when the Fed starts selling off its massive securities holdings in March, Bloomberg News reported that Citigroup analysts said.
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February 2, 2022: Repos are increasingly traded electronically, instead of “old-fashioned phone, chat and yelling across the trading floor methods of trading,” said officials of Tradeweb, an electronic trading platform that saw a 2.3% increase in daily repo volume in 2021. The increase is driven by “the same combination of crazy events that drove the growth in repo activity” in 2021 plus remote work, increased regulatory reporting requirements, quest for yield, easier processing and quicker turnaround, they said.
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February 3, 2022: “The overnight repo market blew up on September 17, 2019, and the Fed had to run to the rescue with trillions of dollars in cumulative loans that went on for months,” wrote Pam and Russ Martens in their Wall Street On Parade blog. One reason repos blew up was that hedge funds had taken out huge repo loans to finance trading and nervous lenders were demanding more collateral, according to the Office of Financial Research.
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February 3, 2022: When the Fed reduces the securities it holds and stops buying more, the impact on the financial markets is unknown, but one way or another the repurchase market is sure to be in the line of fire, reported Bloomberg
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February 4, 2022: Hedge funds were a key contributor to market disruption in March 2020, and the Office of Financial Research should consider ways to get better data on their bilateral repos, an important source of leverage for hedge funds, said the Financial Stability Oversight Council.
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February 12, 2022: To fight inflation, the Fed is expected to soon start withdrawing excess cash from the financial markets, estimated at $3.8 trillion, by stopping the purchase of securities that it launched in March 2020 to fight the market’s COVID collapse. But what’s it going to do about the $1.9 trillion in securities that the Fed sold on the repurchase market and must soon buy back or roll over, asked John Mason at the Seeking Alpha blog. “How the Fed is going to work through all the situations it has created in the past two years is a real mystery,” he said.
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February 16, 2022: More transparency for a segment of the repo market is coming, said the Depository Trust and Clearing Corp., which announced that before the end of March it will begin daily publication of a summary of repo transactions conducted by its Fixed Income Clearing Corp. including number, dollars and rates for its estimated $3 trillion in repo and reverse repo daily.
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February 22, 2022: The Standing Repo Facility, a new central bank operation designed to help address market liquidity issues, is suffering from stigma and may be falling short of its potential, said Bill Nelson, a former top Federal Reserve staffer and now chief economist with the Bank Policy Institute financial industry group.
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February 2022: Regulators should prevent giant banks from becoming excessively interconnected with other risk-taking banks, wrote Levent Altinoglu of the Federal Reserve and Joseph E. Stiglitz of Columbia University. They found the Fed’s recent decisions to rescue large, interconnected banks encourages both the interconnectedness and risk-taking, leading to “too interconnected-to-fail” problems. Requiring higher levels of capital does not solve this problem, they said.
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March 3, 2022: Especially in Europe, dealers and investors are hoarding the safest assets, causing a shortage of repo collateral and threatening to gum up the financial markets, reported Reuters.
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March 7, 2022: The introduction of central bank digital currencies is on the horizon, and the future success of repo could depend on how it’s handled, reported Finadium, a consultancy that specializes in securities finance. “Depending on critical design choices, their introduction could spell large scale disruption for repo markets or could mean no change at all. It is too early to say,” wrote Finadium founder Josh Galper.
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March 9, 2022: The Fed’s new standing repo facility and its new repo facility with foreign central banks do make a minor crisis less likely, but they also increase the chances of another *major* crisis as they put taxpayers on the hook for system-wide losses in shadow banking, tweeted Columbia University law professor Lev Menand.
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April 11, 2022: The money market fund industry doesn’t like some of the new regulations proposed by the Securities and Exchange Commission to try to prevent Fed bailouts like happened in 2008 and 2020, when runs on money market funds threatened the entire financial industry mainly through interconnections on the repurchase market. But advocates of the reform say money market funds are operating with an implicit government guarantee without having to pay for it, Reuters reported.
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April 26, 2022: Participants in the notoriously opaque repurchase market will now be able to compare the interest rates on their US Treasury deals with others, according to consultant Finadium which announced a new US Treasury Repo Benchmarking service.
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July 6, 2022: Only 60% of bilateral repos held by UK banks are backed by high-quality collateral, and on average about 30% of collaterals are rehypothecated, according to a study by analysts at the Bank for International Settlements.
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July 11, 2022: The Federal Home Loan Banks’ business model of borrowing extensively in short-term funding markets and providing longer-term funding to their depository institution and insurance company members carries risks for the financial system, wrote Daniel K. Tarullo, a fellow at the Brookings Institution.
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July 19, 2022: African economies wracked by the pandemic and Russia’s war in Ukraine need better access to international capital markets including a repurchase market where African bonds could be used as collateral to get affordable loans, wrote Dr Vera Songwe, Under-Secretary-General of the United Nations and Executive Secretary of the Economic Commission for Africa, in The New Times.
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August 1, 2022: The Office of Financial Research announced it has begun gathering data on non-centrally cleared bilateral repos, which are “critical in our financial system’s money and securities markets” but “a blind spot for regulators.”
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August 2, 2022: As interest rates rise, investors are taking money out of banks and giving it to money market funds, which then use it to make repo loans to the New York Fed because the Fed is paying a record 2.3%, reported Reuters. Some observers worry this will hinder bank lending during already-difficult economic times, Reuters said.
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August 7, 2022: Former Bank of England deputy governor Paul Tucker said British financial regulators must regulate shadow banking or their failure could come back to haunt them, reported the Financial Times. “What if … some massive part of shadow banking unravels?” Tucker wants companies that claim their assets are “safe” to be required to hold 100% Bank of England insurance.
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August 10, 2022: Traders in the U.S. Treasury repo and securities markets disagree on whether more central clearing would be a good idea or even whether it would have helped stabilize markets in past times of turmoil, said a survey of its members by the International Swaps and Derivatives Association.
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August 19, 2022: The Yale School of Management has raised $7.5 million to support the work of the Yale Program on Financial Stability, which studies systemic risk and tries to draw practical lessons from past financial crises. the school said. Leading contributors are Bloomberg Philanthropies, Dalio Philanthropies, Gates Ventures, Sheryl Chip Kaye, and an anonymous donor.
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August 24, 2022: The Office of Financial Research is laying the groundwork to begin collecting data on the non-centrally cleared bilateral repo market, which is mainly primary dealers trading with levered funds like hedge funds, it said. Research “has shown that blind spots in repo markets have become more acute with recent events of repo market disruptions in September 2019 and March 2020,” the office reported.
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August 24, 2022: Non-centrally cleared bilateral repo probably represents 60% of primary dealer reverse repo and perhaps 37% of primary dealer repo, reported the Office of Financial Research. It probably includes riskier collateral like asset-backed securities than other parts of the repo market and is a key source of leverage for hedge funds, which in turn could create risks to financial stability, the office reported.
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August 30, 2022: Regulators don’t have the tools they need to adequately oversee repo transactions that use U.S. Treasury securities as collateral, said Better Markets, a Washington, D.C., think tank that studies the financial markets. “The lack of transparency in one of the most important markets in the world has contributed to several liquidity crises over the past decade, including the March 2020 turmoil,” said Better Markets.
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September 2022: Universal banks, which combine commercial and investment banks, trade in borrowers’ stocks on inside information they acquire from borrowers, even though trading on inside information is illegal, German and U.S. economists say their research has revealed.
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September 5, 2022: The rising cost of collateral due to high and volatile energy prices is once again threatening the financial stability of otherwise strong European energy companies, prompting some EU countries to prepare emergency support, reported Finadium. “There should be a better way to handle this than emergency government intervention,” said editor Josh Galper.
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September 8, 2022: According to primary dealer data published by the Federal Reserve, 48% of primary dealer repo and reverse repo exposure is in uncleared bilateral repo, compared to 25% in tri-party, 23% in cleared bilateral and 4% in GCF Repo, a service of the Fixed Income Clearing Corporation.
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September 9, 2022: The Dodd-Frank Act of 2010 said the Fed cannot make emergency loans to save individual financial institutions, but the Fed appears to be getting around that provision by making short-term repo loans – legally called purchases, not loans – such as the $455 billion that Citigroup got April-June 2020, said Wall Street on Parade after analyzing data just released by the Fed.
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September 10, 2022: When central banks buy securities to put money into the financial markets (quantitative easing), commercial banks increase their short-term borrowing and lending, including repo. When central banks try to withdraw that money (quantitative tightening), banks keep that short-term business, which is risky when interest rates are rising. Why? Is it because they know central banks will bail them out? Regulators need to figure this out, write economists Raghuram G. Rajan and Viral Acharya.
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September 14, 2022: Average daily volume in the Treasury repo market is almost $4 trillion, the Securities and Exchange Commission reported.
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September 14, 2022: The Securities and Exchange Commission, which oversees central clearing houses, proposed regulations to increase central clearing of repos and other transactions involving Treasuries, which has fallen in recent years. This “should increase regulators’ visibility into these markets, in particular the often opaque repo market.,” the SEC said. But the regulations are “likely to draw pushback from parts of Wall Street,” wrote Bloomberg reporters Lydia Beyoud and Liz McCormick. Especially from hedge funds, some said.
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September 16, 2022: With September 2019 in mind, when “turmoil in the market for repurchase agreements froze the funding universe and forced a Federal Reserve intervention,” some market participants are watching the Fed’s current effort to sell off securities with a wary eye, reported Alex Harris for the Wall Street Journal.
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September 21, 2022: European traders think 10-11% repo rates could return at year-end, said panelists at Deutsche Börse’s recent Global Funding and Financing Summit, according to a report by consulting firm Finadium. This could strain the repurchase market. See https://repowatch.org/2021/08/11/yep-the-2020s-feel-like-the-1920s.
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September 22, 2022: The wider repo market, beyond interdealer transactions, has been slow to adopt electronic trading, but that could change because of regulations and costs, reported consulting firm Finadium.
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September 22, 2022: The Fed’s increase in interest rates is driving trillions of dollars into the Fed’s standing repo facility to snag the high rates, the Wall Street Journal reported. If this cash comes from terminated repo loans, that can cause a problem in the financial markets, according to research by economist Carolyn Sissoko.
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September 23, 2022: Transactions between U.S. primary dealers and their mainly-foreign subsidiaries quadrupled from $335 billion in 2001 to $1.2 trillion by 2007, 25 percent of all repos and 62 percent of all securities lending were sourced from these subsidiaries and this lending collapsed by 55 percent during the 2007–09 crisis, wrote economist Arun Gupta in the Journal of Financial Crises.
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September 29, 2022: “If you have a pot of money that is immune to bank runs, over time, modern finance will find a way to make it vulnerable to bank runs. That is an emergent property of modern finance,” wrote Bloomberg columnist Matt Levin. Economist Carolyn Sissoko tweeted that she would add, “… via derivatives & repo exposure.”
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October 7, 2022: The Fed’s new standing repo facility is an enticing place to invest cash, but it’s drawing that cash from the banking system and causing a shortage of cash to buy other assets, wrote Real Investment Advice.
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October 12, 2022: Not since the Great Financial Crisis of 2007-2009 has there been such intense focus on the possibility of a systemic financial shock, wrote Morningstar. “Right now, our analysts are … watching the impact of Quantitative Tightening on the ‘plumbing’ of the Fed, banks, and repo markets,” Sebastien Page with T. Rowe Price told Morningstar.
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October 17, 2022: The Fixed Income Clearing Corporation, which clears trades of fixed income securities, has asked the Securities and Exchange Commission to increase the fee it charges repo participants so it can build a stronger buffer against sudden repurchase market instability.
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October 18, 2022: The repo market is now the largest fixed income and money market in China, reports Securities Finance Times’s review of the International Capital Markets Associations’ just-released guide to China’s repo market. The guide cautions that collateral is relatively illiquid, a systemic risk and a significant funding risk for borrowers.
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October 18, 2022: A Dutch pension manager wants the European Central Bank to provide emergency cash for the repo market, as the Fed is doing with its standing repo facility, because when interest rates suddenly rise “it’s not certain whether the repo market is large and stable enough to function,” the manager told International Publishers Limited.
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October 20, 2022: Central banks had to intervene when repurchase markets threatened collapse in March 2020, even those using government bonds as collateral. For stability, governments should consider central clearing, more trading transparency, and encouraging participation of non-bank financial institutions, said the Financial Stability Board. Market participants should manage their own risks and not rely on central banks, the board said.
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October 24, 2022: The Federal Reserve should not open its Standing Repo Facility beyond primary dealers because a government that protects investors from their own risky actions encourages investors to take more risk, wrote editor Josh Galper at Finadium. “Markets should not be coddled. … Markets without fear are foolish and serve to generate the very financial instability that the Standing Repo Facility is trying to protect against.,” Galper wrote.
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October 25, 2022: Most secured financing markets like repo are bilateral and overnight, and they can still collapse as Lehman did in 2008 in spite of reforms, which suggests that central clearing would be a better way, wrote editor Josh Galper at Finadium.
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October 25, 2022: The European repo market needs more high quality, liquid securities or cash to use as collateral, or it could experience “rising dysfunction,” warned the International Capital Market Association.
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October 26, 2022: The repo market is starting to target collateral and trading partners that are identified as meeting environmental, social and governance (ESG) standards, but those standards are not guaranteed and ESG repo is at an early stage, said the International Capital Market Association.
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October 31, 2022: The European repo market grew 10.9 percent in the 12 months ended June 8, according to the International Capital Market Association.
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October 31, 2022: The International Capital Market Association has warned that the European repurchase market is in fragile condition and could be particularly troublesome at year end, reported Euromoney reporter Jon Macaskill.
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November 1, 2022: The Federal Reserve is borrowing more than $2 trillion daily on the repurchase market and paying giant financial institutions 3.05%, a strategy that is intended to stabilize financial markets but also favors large investors over lower-income Americans and provides “incentives against finding investment opportunities in the private economy,” wrote Forbes contributor Norbert Michel.
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November 2, 2022: Non-bank financial institutions have escaped meaningful regulation in spite of being at the heart of the financial crisis of 2008 and every market fright since, but the pension panic in Britain in September may spur UK regulators to take action on their own, two sources told Reuters.
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November 7, 2022: Shadow banking has depended on the repurchase market for financing since shadow banking was born in 1953, wrote Bloomberg editor Tracy Alloway. Today the Fed is deeply involved in trying to stabilize the unpredictable market, both making and getting repo loans. It’s yet to be seen if this Fed involvement is good or bad, Alloway wrote.
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November 10, 2022: Still trying to figure out how to prevent another 2008-type crisis, the Financial Stability Board said in a “progress report” that regulators may want to try central clearing and more transparency for their repo markets. The main concern is shadow banking by non-banks which includes almost half of global financial assets, up from 42% in 2008.
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November 12, 2022: The Beijing Stock Exchange is preparing to start securities lending and margin trading, reported China Daily. Margin trading is when you buy and sell stocks or other types of investments with borrowed money.
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November 15, 2022: A New York Fed staff report said current conditions in the Treasury Market – high volatility, high illiquidity, high trading demand – are similar to those during the market disruptions around the near-failure of Long-Term Capital Management in 1998, during the 2007-09 financial crisis, during the October 15, 2014, flash rally, and during the COVID-19-related disruptions of March 2020. All were periods when runs threatened the repurchase market.
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November 16, 2022: The Securities and Exchange Commission is proposing that clearinghouses be required to ensure that their members bring all of their repo transactions collateralized with Treasuries into the clearinghouse, chair Gary Gensler sold the Treasury Market Conference.
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November 16, 2022: The Fed’s new standing repo facility, which lets eligible firms quickly get a cash loan with Treasury collateral, should be opened beyond large banks to other market participants and that could protect the Fed from having to intervene in market panics, said some participants at a New York Fed event reported by Reuters.
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November 16, 2022: Fourteen years after repo crashed the financial markets, regulators still don’t require transparency in the bilateral repo market, which is about 60 percent of primary dealer repo lending and about 40 percent of their borrowing, mainly to hedge funds, making it hard to watch repo for rising risks, U.S. Treasury official Nellie Liang said at the 2022 Treasury Market Conference.
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November 17, 2022: Dangerous leverage is lurking in shadow banking, as we saw in the collapse of the Archegos family investment fund in 2021, the pension panic in Britain in September, even the failure of Long-Term Capital Management in 1998, wrote Paul J. Davies, a Bloomberg Opinion columnist. Repo was a key feature of these crises.
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November 17, 2022: Dealers are not collecting enough margin on repo trades with hedge funds, with trades being conducted mainly in the opaque bilateral market, said SEC chair Gary Gensler at the Fed’s Treasury Market Conference, as reported by Risk.net.
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November 18, 2022: A facility to repo African Eurobonds has launched, reported Euromoney.
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November 18, 2022: For years, regulators have called for greater insight and transparency into the repo market, yet the market continues to be a blind spot for regulators, especially bilateral repo conducted between two firms without a middleman, said James Martin, Office of Financial Research official, at the 2022 Financial Stability Conference in Cleveland.
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November 21, 2022: Regulators promote central clearing as a way to control risk, but this ignores the potential for systemic risk created when these central counterparties are connected through banks to other central counterparties, wrote Bank for International Settlements analysts.
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November 22, 2022: The Living Wills that giant banks are supposed to write, describing how they can be unwound during bankruptcy if they’re on the brink of failure, today seem “like a fairy tale,” wrote FDIC director Rohit Chopra. Instead, they’ll have to be bailed out again, as they were in 2008, and “bailouts of large, dominant, or politically connected firms are a sign of cronyism, not capitalism.”
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November 23, 2022: Singapore’s DBS Bank said it has executed its first intraday repo transaction using a JP Morgan network powered by blockchain, Ledger Insights reported. This means instant settlements and maturity of the transactions within hours, instead of the current industry norm of one to two working days, reported Securities Finance Times.
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November 29, 2022: Where are the U.S. bank regulators? They let both the crypto exchange FTX and the crypto trader SoFi acquire commercial banks. “The American people need to put this issue on the front burner before there is a replay of the financial collapse of 2008 – or worse,” wrote the Wall Street On Parade blog.
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December 1, 2022: When investment funds used by British pension plans couldn’t find enough collateral to meet demands of their repo lenders in September and the Bank of England had to intervene, it was one more example of the fragility of the repurchase market, wrote guest columnists for the Finadium consulting firm. Central clearing for repo is one solution, they believe.
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December 2, 2022: Money market funds are pouring money into the Fed’s new reverse repo facility because a regulation that tries to strengthen banks, by requiring them to hold more reserves and Treasuries when they take more deposits, has discouraged banks from taking deposits or repo loans from money market funds, Reuters reported.
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December 5, 2022: The repo rate in the dollar market is rising as demand for the overnight borrowing grows, Bloomberg reported.
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December 5, 2022: Repo and reverse repo transactions outstanding in the Asia-Pacific non-Japan region were 19.5% higher in June than a year earlier, according to the International Capital Market Association as reported by Securities Finance Times.
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December 5, 2022: Russia is borrowing heavily at repo auctions held by the central bank to pay for its defense spending, the British Ministry of Defense said, according to a Reuters report.
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December 5, 2022: More than $80 trillion outstanding in foreign exchange and currency swaps based on U.S. dollars, much very short term, is hidden in off-balance-sheet activities and is a serious threat to worldwide financial stability, reported the Bank for International Settlements. These transactions resemble repos, with currency instead of securities as collateral. Pension funds, insurance companies and foreign banks are big users of both, to borrow and to hedge.
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December 12, 2022: EU banks rehypothecate (reuse) 50-90% of repo collateral, up to seven times what they own, “substantially” increasing their reuse when central banks buy assets (Quantitative Easing). This both alleviates and amplifies market shocks, according to German economists reviewed by Finadium.
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December 13, 2022: Regulators “urgently” need to develop “urgent and robust measures” to address obvious risks in market-based finance including repo, said the Bank of England as reported by Finadium. The September crisis at UK pension plans “led to a vicious spiral of collateral calls and forced gilt sales” and created a “material risk to UK financial stability,” the bank said.
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December 20, 2022: Banks have increased their repo borrowings somewhat in the past five years while shadow-bank repo borrowing has slightly declined, the Financial Stability Board reported. A major change has been money market funds putting cash into the Fed’s repo facility.
RepoWatch 