(Latest update on June 12, 2025. See below for list of 11 central bank bailouts since 1998. )
Why does your RepoWatch editor publish early each year a chronological list of repo news from the prior year, knowing full well that few people will wade through the list?
Frankly, here’s why:
So that no one can pretend ignorance or innocence when a run on repo causes the next massive crash of the global financial markets … and the next big Federal Reserve bailout.
So here I go again.
Below is the 2024 list. It includes 156 warnings. That’s up from 80 in 2023.
Does anyone care?
Ho-hum.
Also below is a list of eight central-bank bailouts since the crash of 2008.
Another ho-hum. Bailouts have become so commonplace, they don’t make much news anymore and most people never hear about them.
“I keep asking myself, what kind of absurd financial system do we have that requires the central bank to bail it out every decade?” said Minneapolis Federal Reserve President Neel Kashkari way back in 2020.
It’s a strange world out there.
Repo worriers and defenders
In the 2024 list of repo news below, who does the most worrying?
The most warnings come from, in this order: global journalists, the Financial Stability Board, global economists, Federal Reserve analysts and a wide group of European regulators.
Who do the worriers worry about the most?
In this order: non-banks, shadow banks, hedge funds and money market funds. It’s these lightly regulated markets, tightly interconnected to banks and each other, that are currently causing the most heartburn.
Also worrisome are financial institutions that are too big to fail (forcing bailouts) and bilateral vs. central counterparties (bilateral is too opaque, central is more manageable but more systemic).
What do the worriers worry about the most?
They worry about runs on the repo market, as happened in 2008 and several times since. In a run on repo, the lender on a repo loan suddenly wants its money back, often the next day. The borrower defaults and is so interconnected with the financial market through repos and derivatives that the whole market panics.
Who loves repo, besides the traders who use it to get rich?
Other countries. Many are developing their own repo markets so they can tap into funds globally. Swell.
And the U.S. Treasury Department and the Federal Reserve. With U.S. debt ballooning from $12.3 trillion in 2004 to $35.5 trillion in 2024, somebody has to buy all that debt, all those U.S. Treasuries.
Repo makes that possible. Traders can get the money to buy the Treasuries by getting a repo loan, often from a money market fund. U.S. status on world financial markets depends on it.
That’s a key reason the Fed has to intervene if the repo market starts wobbling.
Bailouts
In recent years the Federal Reserve and other central banks have repeatedly chosen to prop up entire financial markets, rather than let individual firms fail.
They fear that (1) the interconnectedness of banks and non-banks, mainly through repos and derivatives, and (2) the speed of today’s transmissions, make it impossible to isolate trouble where it began.
“Governments and central banks have expanded their ‘safety nets’ far beyond banks and now protect the entire financial system … thereby undermining market discipline, stimulating dangerous asset bubbles, and increasing social inequality,” said Arthur Wilmarth, professor emeritus of law at George Washington University Law School and author of Taming The Megabanks, Why We Need a New Glass-Steagall Act (2020).
Following is a review of major financial crises in recent years. Most of the crises involved too-big-to-fail firms, most were caused by runs on short-term debt, especially repurchase agreements, and all were resolved by complex bailouts.
As a result, the Fed has been suffering huge losses since 2022, for the first time in its history.
No problem, it’s just temporary, says the Fed.
Ho-hum.
1998: The Fed convinced 14 of the nation’s largest banks to invest $3.6 billion to keep the Long-Term Capital Management hedge fund’s losses from damaging world markets. A key reason for the hedge fund’s collapse was a run on the fund by its repo lenders.
2001: After the terrorist attacks of 9/11, the Fed had to take historic steps to keep the stricken repurchase market alive.
2008: Between 2007 and 2010, the Federal Reserve, the FDIC and the U.S. Treasury evoked emergency powers and poured trillions of dollars into the worldwide financial markets to bring under control a global financial crisis triggered by a run on repo. Major financial institutions were saved, a 1929-style crash was averted and JP Morgan Chase (assets at $1.56 trillion) acquired failed competitors and grew. Meanwhile, more than 8 million Americans lost their jobs and the net worth of American households fell by more than $10 trillion, “… a definitive moment in the rise of wealth inequality within America,” said some economists.
2010: Greece’s debt problems caused panic among investors who used Greek debt as repo collateral, and the European Central Bank had to intervene. In November 2010, the scenes replayed with Irish debt as the troublesome collateral.
2014: U.S. Treasuries, which investors often buy with repo loans and use as repo collateral, suffered a “Flash Rally” shock in October, “unprecedented in the recent history of the Treasury market,” forcing the Fed to launch a series of studies and changes.
2017: Crises at two Italian banks were resolved with lots of government intervention.
2019: In September an unexpected massive spike in the interest rate on repo loans forced the Fed to lend billions of dollars into the repo market and buy Treasuries to fortify that market. The Federal Reserve just released, in January 2025, an eye-opening analysis of this crisis that it wrote back in 2019.
2020: When COVID-19 hit in March 2020, the Fed and other central banks had to intervene in a “Dash for Cash” crisis, beyond anything they tackled in the 2008 crisis, to try to prevent another financial collapse.
2022: British pension plans used repo loans to buy investments as a way to try to solve their underfunded problems. Market turmoil rocked repos and swap derivatives and forced the Bank of England to intervene to avoid a pension meltdown.
2023: Three U.S. banks failed in an otherwise healthy economy, and depositors started taking their money out of other banks. Instead of letting the banks fail, as regulations require, the FDIC launched a bailout of all depositors and a fund to stabilize other troubled banks. JP Morgan (assets now at $3.5 trillion) acquired failed competitors and grew, while other FDIC-insured banks have to pay for the intervention.
2023: Swiss authorities decided they couldn’t let megabank Credit Suisse fail, because it could trigger a panic in global financial markets, and instead they convinced even larger megabank UBS to acquire Credit Suisse.
After Italy bailed out two banks in 2017 and the U.S and Switzerland bailed out four in 2023, some observers concluded that the goal to let failing banks fail — set by the Dodd-Frank Act in 2010 and by various European regulations — has failed.
“I have come to the realization in recent weeks that a globally active, systemically important bank cannot simply be wound up according to the ‘too big to fail’ plan,” Swiss Finance Minister Karin Keller-Sutter told reporters in March 2023.
“Thanks for telling us,” wryly commented the Wall Street Journal editorial board.
Breaking Repo News 2024
Editor’s Note: The following list of repo news in 2024 comes from the Breaking News that I post daily at repowatch.org. Boldfaced items are the warnings. To see 2025 news, go to Breaking News that I am posting now. – Mary Fricker, Editor.
JANUARY
January 8, 2024: Regulators may need to re-think the safe-harbor bankruptcy exemption for repo collateral because it encourages the growth of speculative basis trades by hedge funds and it makes financial markets vulnerable to fire sales during economic shocks, even when the collateral is safe like Treasuries, concluded economists at New York and Duke universities and the Indian Institute of Management in Bangalore.
*****
January 8, 2024: One favorable interpretation of the recent SEC proposal to require Treasury repo contracts to clear via a central counterparty is that it could eliminate repo’s safe harbor bankruptcy exemption and prevent fire sales caused when lenders seize and liquidate repo collateral during a crisis, also considered economists at New York and Duke universities and the Indian Institute of Management in Bangalore.
*****
January 17, 2024: The basis trade, a risky transaction mainly by hedge funds that has been causing consternation at the Fed for months, is generally financed by repo loans, said a Fed report about the annual U.S. Treasury Market Conference.
*****
January 18, 2024: Cleared bilateral repos in the US hit a record high at the turn of the year, Risk.net reported. Only the Fixed Income Clearing Corporation in New York clears bilateral repos. Lenders are likely taking money out of the Fed’s reverse repo program, where they’ve been safely sitting their cash, in search of more profitable deals, Risk.net said.
*****
January 18, 2024: At the Fed’s annual U.S. Treasury Market Conference, panelists discussed non-centrally cleared bilateral repo which, though opaque, is thought to be the largest Treasury repo market segment. It acts as a major source of funding to non-bank financial institutions, particularly hedge funds, the Fed report said.
*****
January 18, 2024: Panelists said at the annual U.S. Treasury Market Conference that the Treasury market resilience has improved partly because of the Fed’s two new repo facilities and its Bank Term Funding Program, which make cash available when needed by primary dealers and national and international banks.
*****
January 19, 2024: A study by Fed and U.S. Treasury officials found that repo rates spiked dramatically in September 2019 because a confluence of factors hit a market that is segmented and opaque and therefore potentially fragile.
*****
January 19, 2024: The financial crisis was caused mainly by the breakdown of shadow banking, for example the collapse of structured investment vehicles and asset-backed commercial paper conduits that bought asset-backed securities, said Zoltan Pozsar, then an analyst for the New York Fed. His 2010 “Shadow Banking” paper became the most downloaded paper in New York Fed history.
*****
January 19, 2024: The Fed has become “dealer of last resort,” stepping in with financing when markets freeze, said Zoltan Pozsar, an economist known for his analysis of shadow banking.
*****
January 19, 2024: Panelists said at the Fed’s U.S. Treasury Market Conference that central clearing for repo can drive up costs but it may also mean better oversight, more transparency, and efficiencies that could lower costs over time, Finadium reported.
*****
January 22, 2024: Some experts believe the repurchase market could “throw a fit” in the March-to May period because cash is likely to be short at a time when investors will need lots of it, Reuters reported. The Fed expects their standing repo facility, formed in 2021 to make repo loans in a crisis, to prevent problems, an executive told Reuters.
*****
January 22, 2024: Our economy has become reliant on speculators using very complex debt schemes to get rich quick using other people’s money and expecting to be bailed out by governments and central banks that try to keep financial markets from crashing, wrote former banker and author Satyajit Das in the Financial Times.
*****
January 22, 2024: A series of events between March and May could be “a perfect storm for upheaval in the repo market,” banking executives told Reuters. The events include the closing of the Fed’s Bank Term Funding Program, massive issuance of U.S. government debt, quarter tax payments, quantitative tightening and the shift to speedy settlement of security transactions.
*****
January 23, 2024: Repo is expanding thanks to technology innovation and new structures like sponsored repo and peer-to-peer repo, that expose new participants to opportunity as well as volatility and risk, wrote a market executive in the Securities Finance Times. “The repo market is on the brink of a transformative era” where repo would be much more efficient, transparent and accessible, he wrote.
*****
January 24, 2024: Hong Kong said it will further integrate with the Chinese mainland by letting bonds issued by the state and its policy banks serve as qualified collateral in repo transactions with the Hong Kong Monetary Authority, Bloomberg reported.
*****
January 24, 2024: This year the Financial Stability Board in Switzerland will work to enhance the resilience of non-bank financial institutions and work on the functioning and resilience of repo markets, Finadium reported.
*****
FEBRUARY
February 1, 2023: Stress in the Canadian repo market is forcing the central bank to intervene, Bloomberg reported.
*****
February 5, 2024: Tighter regulation of banks since the financial crisis has driven an increase in lending by non-banks – for example, mutual funds, which are subject to fire sales and runs — and that “exacerbates financial instability, especially in turmoil periods,” argue economists with Ohio State University and the University of Melbourne.
*****
February 6, 2023: The European market seems to be warming up to the idea of central clearing for repo and experimenting with ways to make it work for both dealers and clients, consultant Finadium reported.
*****
February 7, 2023: U.S. and European bank regulators are phasing in major changes to required bank capital, with big but as yet unspecified changes for repo, derivatives and more. This will have a major but as yet unknown impact on managers of alternative investments, said consultant Finadium. Alternatives can include investments like hedge funds and private equity.
*****
February 7, 2023: Regulating shadow banking, which is made up of insurers, investment funds and private markets and since 2008 has grown to account for almost half of the world’s financial assets, is “hard going” and “quite frustrating” because it’s international and other countries need to cooperate, said Bank of England Deputy Governor Sam Woods as reported by Reuters.
*****
February 10, 2024: Bank loans to shadow banks are surging, and regulators warn this could pose systemic risks as there is “very little information or oversight” of the risks shadow banks take with the money, the Financial Times reported. Shadow banks often use the loans to increase leverage, for example with repos, and to lend to risky borrowers that banks can’t lend to.
*****
February 20, 2024: The velocity rate of collateral – that is, how quickly it changes hands or is reused – has declined sharply in the European repo markets since the 2008 crisis and must be stimulated, wrote Securities Finance Times.
*****
February 20, 2024: It’s important that G20 members quickly implement proposed tools to address the mismatch between the daily redemption of shares offered by open-ended mutual funds and the longer term of their investments, said Klaas Knot, chair of the Financial Stability Board. Soon the board will also propose policies to deal with “margin and collateral calls” on non-banks, he said.
*****
February 22, 2024: The Fed’s quantitative tightening blew up the repo market in 2019. The Fed hopes to avoid that “debacle” this time by tightening slowly and offering its new standing repo facility so repo players can get quick cash from the Fed if they need it, wrote Wolf Richter at the Wolf Street blog.
*****
February 22, 2024: At the end of the year, repo that had Treasuries as collateral was mostly calm, but under the surface there was some volatility that regulators and participants should keep an eye on, wrote Finadium editor Josh Galper.
*****
February 26, 2024: Financial regulators should carefully scrutinize areas in shadow banking that feature maturity transformation (borrow short, lend long) like money market funds and hedge funds financed by repos, said City Journal.
*****
February 26, 2024: China announced that it will open its repo market to a much bigger pool of foreign institutional investors, all those that have access to China’s interbank bond market, the South China Morning Post reported. The market is currently limited to governments and some major financial institutions.
*****
February 27, 2024: Two years after it was created, banks are starting to use the Fed’s Standing Repo Facility to borrow overnight money with Treasury and agency collateral, suggesting they’re preparing for a potential cash shortage, Reuters reported.
*****
February 27, 2024: In 2021 The Financial Stability Board advised members to deal with the main vulnerability at money market funds, which is that they use short-term money from investors to buy long-term investments, and so far its members’ progress is “uneven,” the board reported.
*****
February 27, 2024: On the 25th anniversary of the collapse of Long-Term Capital Management, Fed vice chair for supervision Michael Barr said banks need to carefully regulate their financing of non-banks like hedge funds. Long-Term Capital Management was a hedge fund that relied heavily on repo financing for its trading.
*****
February 27, 2024: “For those wondering if a UK-style LDI crisis could occur in the US, we think the answer is yes,” wrote Josh Galper at Finadium. In the LDI crisis, British pension plans couldn’t produce enough collateral to meet demands of repo lenders and the Bank of England had to intervene.
*****
February 29, 2024: “One might say that lawmakers’ and policymakers’ failure to answer this question coherently (“what is a deposit, legally speaking?) is the single biggest problem for financial stability policy,” tweeted Vanderbilt professor Morgan Ricks.
*****
MARCH
March 1, 2024: As the Fed continues to reduce its holdings of securities, it’s important to remember that the overnight reverse repurchase agreement facility is telling us money is still available to the market and the standing repurchase agreement facility will lend into the market when money gets tight, said Fed governor Christopher Waller.
*****
March 1, 2024: Conditions in repo markets remain stable, reported the Federal Reserve in its semiannual report to Congress.
*****
March 1, 2024: EU hedge funds are expressing interest in transitioning to centrally cleared repo with their banks acting as sponsors, Bloomberg reported.
*****
March 2, 2024: Citigroup has begun accepting business loans as repo collateral from the giant investment firms BlackRock and Schroders, the Financial Times reported.
*****
March 4, 2024: Hedge funds borrow a lot of money from broker-dealers at Goldman Sachs, Morgan Stanley and JPMorgan, mainly through securities financing like repo and derivatives transactions, and the relationship can be risky, wrote the Bank for International Settlement in its latest Quarterly Review.
*****
March 5, 2024: Five of the 14 U.S. dealers ended last year with record use of debt to try to boost profits, reported Risk.net: Bank of America, Capital One, Citi, Goldman Sachs and PNC Bank.
*****
March 5, 2024: With shadow banks doing so much banking these days, central banks are inevitably going to have to expand their lender-of-last-resort function into the shadows, wrote Alphaville. As was clear in 2020 and 2022, “unorthodox monetary policy is now strikingly orthodox” …. “even if it has never been formally articulated.”
*****
March 7, 2024: The new SEC rule that will require central clearing for many repos is “going to dramatically reshape and reassemble the way the Treasury market operates” and it will have global impact, a BNY Mellon executive told Finadium.
*****
March 12, 2024: Responding to the SEC’s proposal rule that more repo be centrally cleared, the only central counterparty today is growing and other companies are preparing to become central counterparties, said Securities Finance Times and Risk.net.
*****
March 13, 2024: The amount of money that hedge funds are committing to the risky basis trade may be smaller than originally thought, Bloomberg reported. A basis trade bets on the direction of the value of Treasury securities and is usually financed in the repo market.
*****
March 14, 2024: A proposal to require giant banks to report certain risk metrics at the annual average, not at the year-end number, could affect repos, Reuters reported. That’s because big banks temporarily reduce the year-end number by switching bilateral repo with overseas hedge funds to sponsored repo, which costs money but hides the international risk.
*****
March 18, 2024: After “frequent repo market collapses for seemingly minor reasons …. the Treasury-based repo market is plainly on the ropes,” and a new SEC requirement that many traders will have to use a central clearinghouse to process their trades could be beneficial, said financial writer Kurt Dew.
*****
March 18, 2024: Last year’s bank crises proved that more regulation is needed to put an end to too-big-to-fail bailouts, wrote Tobias Adrian and Marc Dolbler for the International Monetary Fund.
*****
March 18, 2024: Three industry associations have sued the SEC, seeking to overturn its new rule that expands the definition – and regulation – of “dealer” to include any firm that “significantly” uses Treasuries for repo collateral and other trading, including some hedge funds, Finadium reported.
*****
March 19, 2024: After the global financial crisis “highlighted major vulnerabilities in repo markets,” a 2016 European regulation required all participant to report their securities financing transactions, and the information being produced can help regulators make repos more stable, said a study by the European Central Bank.
*****
March 20, 2024: BlackRock investment firm will offer a fund that keeps its records in a public blockchain account and invests in cash, U.S. Treasury bills, and repurchase agreements, BlackRock announced.
*****
March 21, 2024: In May the U.S. plans to start settling trades in half the time it currently takes – a settlement cycle called T-1 – and European regulators fear their repo and lending markets could be significantly disrupted if they can’t keep up, Bloomberg reported.
*****
March 26, 2024: Since the 2008 financial crisis, shadow banks have grown dramatically worldwide, spreading global systemic risk that is not being adequately studied or regulated, especially the ways it is interconnected with banks, said a New York Fed staff report.
*****
March 22, 2024: Central clearing plays a crucial role in making securities finance safer and more stable, agreed speakers at a central clearing conference in Madrid.
*****
March 25, 2024: Repo participants who create new kinds of transactions to avoid central clearing mandated by the SEC to begin June 30, 2026, should know regulators will be watching for such evasion, said panelists at a Finadium repo conference in Europe.
*****
March 26, 2024: Tokens that represent money market fund shares recorded on a distributed ledger and used as repo collateral could bring more efficiency and transparency to the transactions and streamline back-office operations, said a UK Treasury Technology Working Group report covered by Finadium.
*****
March 26, 2024: More lenders are coming into the repo market for Asia international bonds, especially issues from Japan, South Korea and Hong Kong, said the International Capital Market Association in a report covered by Finadium. International bonds are those issued in a market outside the issuer’s home.
*****
March 27, 2024: Banks are becoming increasingly interconnected with non-bank financial institutions, and lack of data is preventing regulators from assessing the risk this poses to banking and the financial markets, reported The Banker.
*****
APRIL
April 1, 2024: Finadium editor Josh Galper said he expects the repo market to perform well in the coming months, but he does worry that “excessive” U.S. spending plus tax cuts could cause investors to lose confidence in Treasuries, which are key repo collateral, and create a market shock.
*****
April 9, 2024: Regulators published their first in-depth review of the “shadowy” EU repo market since the financial crisis in 2008 revealed its vulnerability, finding that most transactions are for overnight, uncleared, using government bonds for collateral although non-cleared repo often uses riskier securities, and done by a few giant banks that are widely interconnected.
*****
April 12, 2024: Rates in an important corner of the repo market suddenly fell precipitously March 19 (they recovered the next day), apparently driven by a mysterious $20 billion transaction that afternoon, Reuters reported. This is “one of the world’s more important markets,” but it’s secretive, hard for regulators to understand and “disruptions there can have broad ramifications, including for financial stability,” Reuters said.
*****
April 12, 2024: The safe harbor that the bankruptcy act of 2005 granted private repo lenders with mortgage loans and securities as collateral allowed large dealer-banks to repledge repo collateral, led to a build-up of risky, runnable repo contracts, and was a key reason for the increased financial fragility leading up to the financial crisis, wrote Brittany Lewis, finance professor at Washington University in St. Louis.
*****
April 17, 2024: Some non-bank market participants need to do a better job of preparing for unexpected collateral calls in derivative and securities markets like repo, to avoid crises like “the March 2020 market turmoil, the Archegos failure in March 2021, the 2022 turmoil in certain commodities markets, and the September 2022 issues experienced by many pooled liability-driven investment (LDI) funds,” the Financial Stability Board said.
*****
April 11: 2024: Some asset managers are proposing ways pension plans could get emergency loans in case of a repeat of the EU pension crisis in 2022, wrote Risk.net. In that crisis, pension plans couldn’t find enough collateral to meet demands of their repo lenders during a crisis in the financial markets, and the Bank of England had to intervene.
*****
April 15, 2024: Banks and non-bank financial institutions, or “shadow banks,” are so interwoven that bank regulators need to incorporate that systemic risk in their rules and oversight, conclude three New York economists led by Viral V. Acharya. Proof of the interconnectedness was Fed intervention to save both banks and non-banks in the financial crises of 2008, 2019, 2020 and 2022, they said.
*****
April 16, 2024: Universal banks and shadow banks have created “dangerously unstable financial markets” that depend on frequent bailouts, including four serious financial crises since the financial collapse of 2008, wrote Arthur Wilmarth in a review of “Shining a Light On Shadow Banks” by Patrick Corrigan. A new Glass-Steagall Act is the best way to remove the threats, Wilmarth said.
*****
April 17, 2024: Recent episodes of market stress, including the March 2020 market turmoil, the Archegos failure in March 2021, the 2022 turmoil in certain commodities markets, and the September 2022 issues experienced by many pooled liability-driven investment (LDI) funds, happened when repo lenders and others suddenly demanded more security. Borrowers need to make sure they have enough crisis cash, said the Financial Stability Board.
*****
April 18, 2023: A small group of hedge funds that may now be too big to fail are borrowing heavily on the repo market to buy short positions in U.S. Treasury futures, giving them significant control over that market and potentially posing systemic threats to the financial stability of the global economy, the International Monetary Fund warned and Benzinga reported.
*****
April 18, 2024: Tougher proposed capital requirements for banks will hurt market liquidity and create systemic risk, as in the repo market, and “we haven’t yet seen a way to accomplish both goals at the same time,” wrote Finadium editor Josh Galper.
*****
April 19, 2024: In the U.S. the income share for the top 1 percent has increased from 10 percent in 1980 to 19 percent in 2020, and that’s one reason for the increase in risky non-bank gross short-term wholesale funding like repos, said analysts at the Federal Reserve. For example, wealthier people buy more money market fund shares and those funds make repo loans.
*****
April 19, 2024: In the third quarter of 2023 the banking sector was generally “sound,” but net repo borrowing at hedge funds grew to historic highs, driven by the largest funds, the Federal Reserve reported. Over the past year, the Fed estimated that “runnable” contracts and funds grew 8.8 percent to $21.3 trillion by the end of 2023, including repo which was up 33% to $4.8 billion.
*****
April. 25, 2024: Companies that want to lend to the Fed through the Fed’s Overnight Reverse Repurchase Agreement Facility, mainly money market funds, cannot be firms that were formed just for the purpose of making those profitable loans, the Fed announced.
*****
April 30, 2024: Canada’s first tri-party repo market has gone live with five of Canada’s top dealers conducting inaugural trades, Finadium announced.
*****
April 30, 2024: Since the financial crisis, the cycle of crisis-forcing-central-bank-intervention has repeated several times and we expect that pattern to continue for the foreseeable future, creating moral hazard that will cause further crises, with the repo market at the heart of the disruption, wrote analysts at Barclays.
*****
MAY
May 2024: Crises have become more common in the non-bank financial sector in recent years because they increasing use repos or swaps to finance hedges against loss, said a Bank of England report. Recent crises include the dash for cash in spring 2020, the 2022 commodity
market turmoil following Russia’s invasion of Ukraine, and the UK pension crisis in September
2022, the report said.
*****
May 2024: The Fed’s constant bailing out of the financial markets means everyone borrows limitlessly, enjoying tax advantages of debt without worrying about risk, and “the system will sooner or later fall apart,” wrote Hoover Institution economists John H Cochrane and Amit Seru. The solution is that all risky investing must be financed by equity and long-term debt.
*****
May 2, 2024: Concerned about how unprepared non-bank financial market participants may be for sudden margin and collateral calls in securities and derivatives markets, the Financial Stability Board will discuss its proposed policy recommendations at a meeting May 31, the board announced.
*****
May 2, 2024: Driven mainly by unfolding regulations, securities lending today “is a far cry from the securities lending market of a decade ago,” said Finadium editor Josh Galper. Lenders need to be alert, he said.
*****
May 3, 2024: The importance of non-bank financial institutions continues to grow. We need to contain runs in that sector and watch the build-up of leverage to reduce the need for “extraordinary central bank interventions,” said Klaas Knot, chair of the Financial Stability Board. It’s time to implement the tools that are needed, he said.
*****
May 6, 2024: Within months, major dealers who trade in the non-centrally cleared bilateral repo market will have to start reporting details of their daily trades to the Office of Financial Research, an extraordinary, long-delayed effort to let regulators see inside one of the riskiest, most opaque financial markets, the office announced.
*****
May 7, 2024: Securities financing markets, which include repo and securities lending, are undergoing “unprecedented” changes with new technology and new regulations, and management must adjust, reported Finadium.
*****
May 8, 2024: Beginning in October, the SEC will require significant changes for some money market funds, including that institutional prime and tax-exempt money market funds charge investors a fee when daily redemptions exceed 5% of net assets, to discourage runs on the funds such as occurred in 2008 and 2020. Some of the funds already starting to convert to government-only holdings or close completely, Bloomberg reported.
*****
May 8, 2024: The SEC adopted a rule last year that requires most repo transactions to be cleared by June 2026, reviewed U.S. Dept. of Treasury official Joshua Frost at the Fed’s annual meeting of Primary Dealers.
*****
May 9, 2024: Experts are starting to take a closer look at non-bank financial institutions and the systemic risks associated with the fast-growing sector of the worldwide financial markets, wrote VoxEU columnist Stijn Claessens, who footnotes 15 related studies published 2020-2024.
*****
May 9, 2024: Systemic risk is considerably higher now than it was in 2010, especially for larger banks, showing that the Dodd-Frank Act failed in its purpose to end “too-big-to-fail” banks, wrote four professors at the University of Westminister in the UK. “Therefore, regulators need to do more in the future to avoid significant contagion in the banking system,” they said.
*****
May 10, 2024: The repo market is more “fragile” than it was a year ago but it’s liquid, said a State Street official at the Securities Finance Symposium, echoing the positive view of many panelists at the meeting that “in times of risk and uncertainty, opportunity is often also abound,” reported by Securities Finance Times.
*****
May 10, 2024: The Financial Stability Oversight Committee, created after the financial crisis of 2008, said it wants state regulators and Congress to toughen regulation of non-bank companies that service mortgage loans, including setting up an FDIC-type insurance fund financed by the non-bank firms to resolve failed companies and avoid taxpayer bailouts. Non-bank firms, which serviced 4 percent of the market in 2008, now service 54 percent, the report said.
*****
May 13, 2024: The new rule on uncleared bilateral repo reporting issued last week by the Office of Financial Research is “well written and thought-out,” wrote Josh Galper, managing principal at capital markets consultant Finadium. “Hats off to the OFR for a rule that makes sense,” Galper wrote.
*****
May 13, 2024: Canadian hedge funds and pension funds increased their repo borrowing about 75% and 14% respectively in the past 12 months, the Bank of Canada reported. About half of the pension repo is for more than one month, while about 70% of hedge-fund repo is under one week and “very large and highly concentrated” in some cases, the report said.
*****
May 13, 2024: The build-up of hedge fund leverage in the U.S. Treasury market, for example by using Treasuries as collateral for repo loans that then finance more Treasuries, is creating financial stability risks, said a European Central Bank report.
*****
May 22, 2024: Investors that buy and hold commercial paper and certificates of deposit can find it hard to sell them when the investors need to raise money, said a Financial Stability Board report. One solution is to use them as repo collateral, but “there are material challenges and risks associated with this proposal,” the report said.
*****
May 23, 2024: Current regulations are not sufficient to ensure the stability of the non-bank financial sector, and the need to make that part of the market safe and sound is especially important as the European Union works to unite its countries’ capital markets, said a top executive of the European Systemic Risk Board.
*****
May 25, 2024: The Bank of England said it is going to stop buying securities to add cash to the financial markets and instead go back to making short-term repo loans, as was its practice before the financial crisis in 2008.
*****
JUNE
June 2024: “The Federal Reserve has conducted significant interventions in the repo market” and the consequences are not clear, reported finance professor Julia Selgrad. For example, money market funds have been pouring cash into the Fed’s overnight reverse repurchase facility instead of lending to dealers who are important lenders in the private repo market.
*****
June 3, 2024: European capital markets need to expand securities lending and borrowing to meet the area’s growing financial needs, said the International Securities Lending Association.
*****
June 6, 2024: J.P. Morgan is the nation’s largest provider of warehouse loans to mortgage lenders with $20 billion in commitments at March 31, many to non-banks, according to a new analysis from Inside Mortgage Finance. Warehouse loans are mainly structured as repurchase agreements, and it was a run on repo that fueled the mortgage crash in 2007-2008.
*****
June 10, 2024: The repurchase market is facing big changes because of new regulations and changes that market participants are initiating, said a repo business executive in the Securities Finance Times. Central clearing, much faster trade resolution, and integration with other markets are examples, the report said.
*****
June 10, 2024: Technology is making it possible to collect and disseminate much more data about the repo market than ever before, said a securities finance executive in Securities Finance Times.
*****
June 11, 2024: Federal regulators must ignore complaints from giant banks and require them to have much more of their investors’ cash at risk, more “skin in the game,” wrote Art Wilmarth in The Hill. These banks have less padding than smaller banks do, but they take more risk because they know the Fed will have to bail them out, as it did in the 2008 financial crisis and the 2020 pandemic crisis, wrote the author of Taming the Megabanks.
*****
June 11, 2024: Federal debt jumped from $9 trillion to $34 trillion between 2007 and 2023, largely because Congress had to fight financial crises and bail out giant banks, wrote Art Wilmarth in The Hill. Yet these too-big-to-fail banks regularly violate laws, according to regulators. More regulation is “urgently needed,” wrote the author of Taming the Megabanks.
*****
June 11, 2024: In an eerie resemblance to the credit default swaps of the 2008 financial crisis, banks are selling the risk of the loans in their portfolio to investors who often get a repo loan from a different bank to get the money to buy the loans, wrote Bloomberg. Regulators who thought the sale removed risk from banking are starting to realize the risk just gets transferred to the bank that makes the repo loan, reporters said.
*****
June 13, 2024: Higher interest rates drove a 11.5% increase in the European (EU and UK) repo market in the past year as profitability for lenders improved, the European Systemic Risk Board reported. 90% of the collateral was government securities. “Liquidity mismatch, use of leverage and interconnectedness can contribute to systemic risk, amplifying and spreading shocks throughout the financial system,” the report cautioned.
*****
June 17, 2024: Many believe that the growth of non-bank financial institutions means banks are shrinking, that one substitutes for the other, but instead non-banks rely heavily on banks for their funding so they are better described as “intimately interconnected,” said a Liberty Street Economics report led by New York University finance professor Viral V. Acharya.
*****
June 18, 2024: Banks used to make corporate and mortgage loans. Now non-banks make many of them, financed by banks. Banks used to clear non-bank derivatives. Now non-banks centrally clear their derivatives and banks provide them with credit lines. Banks used to make short-term loans. Now they provide financing to non-banks that make the short-term loans. Banks and non-banks have a “symbiotic relationship” and “both sides will be exposed to one another in crises,” reported the Liberty Street team led by Acharya.
*****
June 20, 2024: Banks and non-banks are increasingly dependent on each other, sharing risks that in times like the financial crisis of 2007-08 and the COVID crisis of March 2020 can cause market disruptions that “could be rather severe” and force regulators to have to intervene “en masse,” said a Liberty Street Economics report led by finance professor Viral V. Acharya.
*****
June 20, 2024: The “widely held favorable perception” of post-financial crisis reforms as strengthening the banking system and protecting it from failures of non-bank financial institutions is not accurate, said a Liberty Street Economics report. Regulators need to recognize banks and non-bank financial institutions as “highly interdependent sectors,” the report said.
*****
June 20, 2024: A handful of investment funds have borrowed large amounts in the repo market to make bets on Treasury securities. Some “may have become systemically important to the Treasury and repo markets, and stresses they face could affect the broader financial system,” said an International Monetary Fund report. This “is now worth watching closely,” consultant Finadium said.
*****
June 20, 2024: US money market funds, with about $6 trillion in holdings, are a “mainstay” of US repo markets, said Finadium. When interest rates start falling, making repo less attractive than the stock market, investor withdrawals could be a source of disruption, consultant Finadium cautioned. “Repo dealers should remain attentive.”
*****
June 21, 2024: Regulators concluded the resolution plans submitted July 2023 by Bank of America, Citigroup, Goldman Sachs, and JPMorgan Chase are inadequate. Resolution plans, or “living wills,” tell regulators how these giant banks and repo players plan to safely unwind in the event of bankruptcy. The banks have to try again in July 2025.
*****
June 24, 2024: More than $1.5 trillion in repos and other kinds of securities financing are executed monthly using private blockchains, TradingView reported. Blockchain enables traders to settle billions of dollars in minutes, for example reassigning collateral without actually moving it, potentially simplifying the “incredible spaghetti mess” that is repo today.
*****
June 24, 2024: The UK and EU have required financial institutions to report their repo transactions to regulators since 2020, and some private firms are starting to use that data to make reports that “provide a new level of transparency to the repo markets,” one CEO said.
*****
June 24, 2024: Increasing regulations are making it harder for financial institutions to intermediate in U.S. Treasury markets and “could severely disrupt the functioning of the Treasury repo market” which is one of the most important financial markets in the world, said a report by the Securities Industry and Financial Markets Association.
*****
June 25, 2024: The controversial basis trade, which hedge funds finance by borrowing heavily on the repo market, will probably flourish for the rest of the year, but “should repo markets begin to get stressed, an ugly unwind and hasty and significant short covering could pose a vulnerability for the bond market,” said a BYN Mellon note to clients, reported by Bloomberg.
*****
.June 28, 2024: Some repo rates have been gyrating as a shortage in repo funding develops, Bloomberg reported.
*****
June 28, 2024: Private banks currently enjoy “disproportionate” weight in the Fed’s decision making, said professors at University of Chicago Law School and Georgetown University Law Center.
*****
June 28, 2024: At the end of the quarter, investors like money market funds poured lots of cash into the Fed’s overnight reverse repo facility which is designed to set a floor under short-term interest rates, Reuters reported.
*****
JULY
July 2024: The “unfinished reforms from the Great Financial Crisis, the deregulation that occurred during the Trump administration, the recent stresses in the banking sector in 2023, and the increasing move of finance to digitally based businesses” call for more financial regulation, said Graham Steele writing for the Roosevelt Institute.
*****
July 2, 2024: Reforms aimed at problems in the securities markets that amplified losses during the 2008 crisis have improved the quality of collateral like residential mortgage-backed securities but not collateralized loan obligations, they have distributed risk from banks to non-banks, and they need more analysis, the Financial Stability Board reported.
*****
July 2, 2024: The Financial Stability Board reported that a preliminary analysis suggests that reforms of the securitization market since the 2008 financial crisis appear to have contributed to the market’s resilience without harming the economy.
*****
July 2, 2024: Some repo lenders give preferential prices to some broker-dealers, who can then make oversize profits and “raise the cost of capital for the economy as a whole” when they don’t pass those savings along to their clients and instead re-lend that money at market rates, said an article on the triparty repo market in Knowledge at Wharton.
*****
July 5, 2024: Today is the day a new rule goes into effect that requires brokers, dealers and other financial institutions with at least $10 billion in average daily non-centrally cleared bilateral repo transactions to soon begin reporting those transactions to the Office of Financial Research, the office reported. Reporting must begin by December 2 or April 1.
*****
July 9, 2024: To guard against repo market manipulation, the U.S. Treasury is asking traders who held at least $1.6 billion in 20-year Treasury bonds near the end of 2023 to let the department know by July 15, signaling that the bonds may be scarce, Bloomberg reported.
******
July 9, 2024: The “remarkable” growth of shadow banks is the biggest threat to the Eurozone’s financial system, largely because of opaque links like repos with banks, European Central Bank executive Elizabeth McCaul told the Financial Times. It reminds her of Long-Term Capital Management in 1998, the subprime crisis in 2008, and the Archegos and LDI pension fund collapses in 2021-2022.
*****
July 9, 2024 The chairman of the European Banking Authority said the rapid expansion of shadow banking, and its lack of transparency and “black holes” of information, impede supervision and threaten the resilience of broader financial markets, Reuters reported.
******
July 9, 2024: Regulators worldwide are beginning to “take note” of potential risk in basis trades – where hedge funds use repo loans to speculate on mispricing of financial instruments – and how a sudden unwind could “impact their domestic markets,” said Finadium.
*****
July 12, 2024: Central counterparties to repo transactions could find themselves inadequately covered in a stress event if the repo lender doesn’t charge much for the transaction and accepts risky collateral, said the European Securities and Markets Authority according to Risk.net.
****
July 15, 2024: The Fed wants to collect more information from large banks about their transactions with shadow banks, to improve its annual stress tests, Reuters reported. But a final rule is months away, “meanwhile risks are only increasing” and even if the rule is approved “regulators will remain blind” to much that shadow banks do, Reuters said.
*****
July 17, 2024: In a proposal to stabilize today’s chaotic banking system, only regulated banks could repo, wrote authors Lev Menand & Morgan Ricks. “To a far greater extent than is commonly understood, our financial sector funds itself with extremely short-term debt” which is vulnerable to runs and forcing repeated “extraordinary government intervention,” they said.
*****
July 18, 2024: A lot of work is underway to try to make sure financial market participants have enough collateral and resources to cover potential chaos in the repurchase and other short-term markets, which can unravel and destabilize the system in bad times, said a Bank of England executive.
*****
July 22, 2024: The Bank of England is pulling back from injecting cash into the financial markets by buying assets and wants traders to do their deals with the bank’s long-term repo facility instead, Reuters and Bloomberg reported.
*****
July 22, 2024: Shadow banks are still potentially a serious source of systemic risk and shock, with their excessive and hidden borrowing and lending, said Klaas Knot, chair of the Financial Stability Board. Reforms need to be implemented to “reduce reliance on extraordinary interventions by central banks and other public authorities during times of stress,” he said.
*****
July 23, 2024: As the Eurosystem, the monetary authority of the Eurozone, unwinds its large investment in government bonds, the repo market must step up to provide the cash and securities the financial markets need to operate smoothly, said a European Central Bank study.
*****
July 23, 2024: Why is borrowing from the Bank of England’s Short Term Repo facility, set up in August 2022, suddenly soaring, asks the Financial Times’ Alphaville. Yes, the central bank is downsizing, yet “it would probably be silly to infer that someone is in trouble. But it’s kind of weird that it’s being tapped this much,” Alphaville said.
*****
July 23, 2024: When four banks failed in 2023, the Fed and FDIC launched a massive bailout, even though banks historically failed without causing a systemic crisis and financial reforms following the 2008 financial collapse were supposed to end bailouts, wrote economist Aaron Klein. Bailouts cause slower economic growth and greater income inequality. The Fed needs to be reformed, he said.
*****
July 25, 2024: The Bank of England said it is creating a Contingent NBFI Repo Facility, where non-banks like pension funds, insurance companies and investment funds can borrow cash in times of market dysfunction, an effort to meet the potential risks posed by the growing non-bank financial industry.
*****
July 29, 2024: Australia’s financial regulators have noted “considerable changes” in the size and structure of the country’s repo market in recent years and are considering requiring central clearing for repurchase transactions, Asian Banking & Finance reported.
*****
July 30, 2024: The Finteum firm expects to go live with intraday repo trades later this year, the company reported. Finteum’s distributed ledge technology can do trades that last hours instead of days, “thereby enabling banks to meet customer obligations more quickly” and regulators’ expectations for real-time payments, Finteum said.
*****
AUGUST
August 2024: The repurchase market is far behind other financial markets and needs to embrace electronification, to increase efficiency and scalability, said Nicola Danese, an executive with Tradeweb. Electronification uses artificial intelligence, machine learning, deep learning and other technologies to automate transactions.
*****
August 1, 2024: Even though JP Morgan Chase has five felonies and had to get $2.59 trillion in emergency loans from the Fed in 2019, the Fed has a contract with the firm to hold $2.3 trillion in securities and perform other undisclosed services, said Wall Street on Parade.
****
August 1, 2024: Investors are buying government bonds in the futures market, to lock in good yields, and at the same time they’re selling the futures and hedging by borrowing on the repo market to buy slightly cheaper cash bonds, a so-called “basis trade,” said Reuters. Regulators worry about how these trades could be affected by interest rate moves by the Fed.
*****
August 5, 2024: “We haven’t hit peak nanny state yet, and that’s not good,” wrote editor Josh Galper at Finadium. People worldwide seem to think that regulators should protect all investors and central banks should always bail out markets, and it looks like that’s “set to increase” no matter which political party is in charge, Galper said.
*****
August 6, 2024: Cash that investors are depositing in the Fed’s Overnight Reverse Repurchase Agreement Facility is down significantly while cash they are borrowing from the Fed’s Standing Repo Facility is rising, news outlets said this week.
*****
August 6, 2024: “There are no doubt plenty of nasties lying hidden behind the explosive growth in ‘shadow bank” lending. It’s only when the tide goes out that you get to see who’s been swimming naked, and all that,” wrote Jeremy Warner in The Telegraph. A bear market will “happen one day, no doubt about it,” he said. “But not yet.”
*****
August 13, 2024: Major hedge funds and private equity firms have filed a lawsuit challenging the Securities & Exchange Commission’s right to regulate them, a direct attack on chair Gary Gensler who is leading the SEC’s efforts to more tightly regulate rapidly growing shadow banking, the Financial Times reported.
*****
August 17, 2024: As both political and financial uncertainty grows, investors are increasing using exchange-traded funds in securities lending to hedge risk, said Seeking Alpha.
*****
August 19, 2024: Among many challenges, it’s very important that we look at financial stability issues like “run risk, excessive leverage and bubbly valuations” that could potentially result in “big economic losses” plus “understanding the risks of runs on banks, non-banks and stablecoins,” Fed governor Christopher Waller told a summer workshop organized by the Fed, the Bank of Canada, and a Swiss National Bank foundation.
*****
August 22, 2024: Collateralized trading – which mainly includes repo, securities lending, and derivative trades – is soaring, and that is going to drive a need for distributed ledger technology, said editor Josh Galper at Finadium.
*****
August 23, 2024: The International Capital Market Association has updated its standard repo contract to include intraday repo, where sale and repurchase are done within the same day. Intraday repo is growing as firms incorporate distributed ledger technology, CoinGeek reported. One goal is to enable the continued growth of the repurchase market.
*****
August 26, 2024: With the federal debt, and issuance of Treasuries, soaring, a shortage of firms to repo that debt is looming and banks may have to step in to do the funding, raising worries that rates may rise, said Bloomberg quoting a Citigroup strategist.
*****
August 28, 2024: The Securities and Exchange Commission has delayed, and will draft a new proposal, requiring mutual and exchange-traded funds to ensure that at least 10% of their net assets are highly liquid and to shift the cost of hasty redemptions to investors who sell rather than those who remain in the fund, Reuters reported. Last year it decided to exempt money market funds.
*****
August 29, 2024: Sudden moves in interest rates that shocked financial markets August 5 were largely caused by leverage and margin calls connected to carry trades that continue to pose threats to stability, given the wide and growing use of market-based finance, said Risk.net reporting on a study by economists at the Bank for International Settlements. “Of particular concern are the ones that enable the build-up of large positions in periods of calm and necessitate their quick unwinding when volatility rises,” the economists said.
*****
August 31, 2024: Kuwait is introducing securities lending for traders, to boost the efficiency of Kuwait’s financial markets and facilitate short selling, Finadium said the Arab Times reported.
*****
SEPTEMBER
September 3, 2024: Non-banks don’t need to be regulated like banks, but they do need to be better regulated, according to the chairman of UBS, The Banker reported. “Non-bank financial institutions can be a source of financial instability, combining maturity mismatches and leverage,” The Banker said.
*****
September 3, 2024: It feels like the Securities and Exchange Commission is easing up on its insistence in recent years for tougher regulations covering securities finance, including hedge fund reporting, central clearing and prime money market funds, reported Josh Galper at Finadium.
*****
September 3, 2024: The SEC is the appropriate regulator to oversee money market funds and repo transactions and “they should do so, prudently,” said two law professors at the University of Michigan.
*****
September 4, 2024: If the central clearing requirement for repo announced last year by the Securities and Exchange Commission becomes a market with more than one central counterparty, as now seems likely, that will cause problems and confusion, Curvature Securities executive Scott Skyrm told clients, according to Bloomberg.
*****
September 5, 2024: The Financial Industry Regulatory Authority’s important monthly report on how much securities trading on Wall Street including repo is being done with borrowed money, or on margin – “which is creating giant speculative bubbles” – vastly understates the true volume, reported Wall Street on Parade.
*****
September 10, 2024: In the past decade there’s been a largely unseen lending boom and exploding entanglement between giant banks and shadow banks like hedge and private equity funds, wrote Bloomberg’s Paul J. Davies. A big growth has been in repo financing, especially involving the 10 biggest hedge funds. Earlier this year hedge funds were repo-ing $2 trillion, triple seven years ago and double two years ago.
*****
September 10, 2024: The Fed is probably not going to adopt the tougher Basel III regulations for repo transactions anytime soon, said its vice-chair for supervision, Michael Barr. The standards have also been ignored by EU regulators and “several other major jurisdictions,” he said, and it’s best to first get “international consensus” on what to do about repo. So 16 years after repo nearly crashed the world economy, and 11 years after regulators began working on these reforms, there are still no protections in sight.
*****
September 10, 2024: Australian regulators are considering introducing a voluntary central counterparty for their growing repo market, according to the International Swaps and Derivatives Association.
*****
September 10, 2024: Increasingly banks want to transfer to someone else the risk of the loans they make, and many firms are happy to oblige, said Josh Galper at Finadium. They sell banks a kind of insurance called synthetic risk transfer trades (shades of 2008).
*****
September 12, 2024: The global repo market is undergoing significant regulatory and market challenge, with hedge funds and collateralize loan obligations (shades of 2008) playing an increasing role. “Maintaining a strategic and adaptable approach will be key for participants aiming to optimize returns and manage risks in the evolving landscape,” said the International Securities Lending Association.
*****
September 16, 2024: More data on the carry trade, which roiled global financial markets in July and August 2024, is needed so regulators can get a better picture of how the repo-financed trades impact financial markets, said an article in the Bank for International Settlements Quarterly Review.
*****
September 16, 2024: Private equity firms are increasing investing in insurance companies, and insurers hold a growing portfolio of investments in private markets, which exposes them to riskier and less liquid assets and to interconnectedness with the financial system, said a report in the Bank for International Settlements Quarterly Review.
*****
September 17, 2024: Although the public should not be called on to bail out failing banks, “there is now relatively broad consensus that, at present, there is no effective mechanism to deal with crises of mid-sized banks without public support” because of bailouts in Venice in 2017, the U.S. in 2023, and Switzerland 2023, said the chair of the Financial Stability Institute.
*****
September 19, 2024: The Fed wants repo with Treasuries as collateral to be centrally cleared starting in June 2026, and Finadium projects that 84% of Treasury repo will be centrally cleared by the end of 2026, a stunning transformation.
*****
September 19, 2024: Repo and securities lending traders are making a massive transition that replaces humans looking at trading screens to AI. “While no large bank is ready to have AI push the ‘trade now’ button, and regulators have voiced their discomfort with this last step as well, the technology is capable once humans decide the time is right,” wrote Finadium editor Josh Galper.
*****
September 19, 2024: The Bank for International Settlements warned that a move to central clearing for repo-ed government bonds, as being mandated by U.S. authorities, doesn’t fully eliminate risk. For example, the central counterparty would likely become “one of the most systemic entities in the entire financial system,” the study said.
*****
September 20, 2024: Authorities studying the functioning of the market for U.S. Treasuries – which is “the deepest and most liquid market in the world and a central component of the financial system” – consider as progress the recent SEC rule requiring central clearing for Treasury repos and the Treasury rule requiring firms to soon report their non-centrally cleared bilateral repos, said a joint agencies report.
*****
September 20, 2024: A plan announced by Fed vice-chair Michael Barr on September 10 to dramatically cut US regulators’ previous proposal to increase bank capital requirements “is running into a wall of resistance at the Federal Deposit Insurance Corp.,” said the Business Times.
*****
September 23, 2024: Hedge funds have substantially increased their trading in some areas of European markets in recent years, which can help with market efficiency and liquidity but can amplify market shocks, said researchers from the European Central Bank. They’re reassured that hedge funds are involved in only about 10% of repo transactions.
*****
September 25, 2024: Some money market funds have as much as 45% of their portfolio in centrally cleared sponsored repo, which reduces their exposure to a particular counterparty but concentrates their exposure at the central counterparty, reported the Office of Financial Research.
*****
September 26, 2024: Repo and securities lending operations, traditionally operated at separate trading desks, are beginning to merge to improve trading opportunities and efficiencies, wrote Finadium editor Josh Galper.
*****
September 26, 2024: Most of the parts of the market that trades Treasuries appear stable, but the repo market – which redistributes liquidity from those who have too much to those who need more –could become “more susceptible to hard-to-predict shocks” and the Fed is monitoring it, said Roberto Perli, manager of the Fed’s System Open Market Account.
*****
September 26, 2024: Credit provided by non-banks now exceeds credit provided by banks, said Treasury Secretary Janet Yellen. “This makes non-banks an essential source of financing …. And this also means we need to focus on their vulnerabilities,” she said.
*****
September 26, 2024: The build-up of large short-term debt is prone to quick unwinding and regulators must “vigilantly monitor” the interconnections of banks and non-banks, said the Basel Committee on Banking Supervision.
*****
September 26, 2024: “There is now relatively broad consensus that, at present, there is no effective mechanism to deal with crises of mid-sized banks without public support,” said Fernando Restoy, a leading European economist.
*****
OCTOBER
October 1, 2024: Non-bank financial institutions are risky to the financial system, as are the banks they work closely with, said Liberty Street Economics.
*****
October 2, 2024: “More work is needed to better understand the systemic risks of the non-bank sector in the same depth as those for the banks …. and let me underline the importance of data – access to data, better use of data – in the analysis of non-banks,” said Olli Rehn, a vice-chair of the European Systemic Risk Board.
*****
October 3, 2024: Mandatory central clearing in 2026 for more than $3 trillion in daily repo transactions with Treasuries as collateral may make the market more resilient in times of stress, but it may also increase costs and risk, wrote a Bank of New York official in the Securities Finance Times.
*****
October 3, 2024: In the first days of October, tension in U.S. money markets was highest since early 2020, and could lead to severe disruptions in repo markets, wrote Bloomberg columnist Paul J. Davies. “It might not be time to really get nervous … but it’s definitely time to pay more attention,” he said.
*****
October 7, 2024: Two too-big-to-fail global banks and three large global banks do not have the required financial cushion to survive a financial crisis without requiring a bailout, regulators reported. “If the institutions meant to lead the charge in financial stability are struggling to meet their requirements, the risk of broader systemic failure remains real,” wrote the Finadium editorial team.
*****
October 8, 2024: European Central Bank regulators did a “deep dive” into the “staggering growth” of shadow non-banks globally and found that banks are deeply connected but can’t tell where or how much. “Concentration risk could be significant …we must get ahead of these risks,” said Elizabeth McCaul, a member of the bank’s supervisory board.
*****
October 10, 2024: Some observers are warning that repos could be approaching a surge in volatility similar to the one in September 2019, the Financial Times’ Alphaville and Reuters reported.
*****
October 11, 2024: Regulators need to improve the ways they stress test banks to see if they can meet the challenges presented by a sudden shortage of funds, said a Financial Stability Institute study.
*****
October 11, 2024: Repo lenders cannot be counted on to provide cash when struggling banks need a repo loan, even if the bank offers “high quality liquid assets” as collateral, concluded the Basel Committee on Banking Supervision in its review of the collapse of Silicon Valley Bank in 2023.
*****
October 14, 2024: “Private credit markets have expanded rapidly with limited regulation. They pose significant risks to financial stability, particularly since they have not been stress-tested in a downturn,” said Shaktikanta Das, governor of the Reserve Bank of India, in a review of risks facing central banks.
*****
October 16, 2024: The SEC’s rule that all repos and other transactions with U.S. Treasury securities should be centrally cleared by the end of 2025 should be postponed, to make sure the change is implemented properly, said SEC Commissioner Hester Peirce, as reported by Risk.net. “This is complicated, and we want to get it right,” she said.
*****
October 21, 2024: The big spike in the repo rate at the end of the third quarter shows that “repo shenanigans can ripple in unpredictable ways,” but the Fed seems to be able to deal with it, said the Financial Times’ Alphaville blog. “In other words, this is not a systemic thing.”
*****
October 22, 2024: “The non-bank financial sector continues to face serious vulnerabilities … (that) have the potential to cause systemic risk,” said the chair of the Financial Stability Board. The board has made key recommendations, but they won’t solve problems unless regulators implement them, he said.
*****
October 22, 2024: The shift in financial intermediation toward non-banks requires that central banks must figure out ways to evaluate non-banks and be prepared to bail them out in a crisis, said Andrew Bailey, governor of the Bank of England. Non-banks are “disparate in nature, opaque in important places and the interlinkages are, unsurprisingly, therefore complex and hard to observe,” he said.
*****
October 22, 2024: In spite of complaints, the SEC is going to stick to its timetable for central clearing of repo and other transactions involving U.S. Treasuries, which is the end of 2025 for broker-dealers and after June 30, 2026, for everyone else, chair Gary Gensler said.
*****
October 23, 2024: The European Central Bank has successfully conducted trials processing repo transactions cleared by a central counterparty using distributed ledger technology, the Securities Finance Times reported.
*****
October 23, 2024: Commercial bank activity in the Argentine repo market skyrocketed earlier this month as declining interest rates fueled a demand for credit, Bloomberg reported.
*****
October 24, 2024: Regulators are uncertain how to oversee the growing trend for technology firms to partner with banks and offer banking services, said a Financial Stability Institute study.
*****
October 24, 2024: Upcoming central clearing for repo and other U.S. Treasury markets is a “seismic” change creating worry and uncertainty, but the successful implementation of similar mandates for derivatives in 2010 and for swaps in 2014 is reassuring, said a Tradeweb executive writing for Finadium.
*****
October 25, 2024: The Philippines is planning to boost its repurchase market to help finance one of the fastest growth rates in Asia, Bloomberg reported.
*****
October 25, 2024: The SEC adopted rules to enhance the safety and soundness of clearing agencies, as markets prepare for the required migration of repo and other U.S. Treasury markets to central clearing starting at the end of 2025.
*****
October 28, 2024: China’s central bank announced that it will expand its repurchase market to include repos carried out once a month with a tenor of no more than one year. The market lacked a tool for periods ranging from one month to one year, it said.
*****
October 28, 2024: Jamie Dimon, CEO of JP Morgan Chase, vowed to oppose some proposed regulations, saying, “We are suing our regulators over and over and over because things are becoming unfair and unjust, and they are hurting companies, a lot of these rules are hurting lower-paid individuals,” Reuters reported.
*****
October 29, 2024: CME, a US financial market infrastructure firm, has filed with the SEC to clear US Treasury cash and repo transactions in preparation for the SEC’s clearing mandate that goes into effect at the end of 2025, reported Risk.net.
*****
October 29, 2024: The Inter-Agency Working Group said markets that trade US Treasuries, mainly repo, are stable but uncertain. Money market fund reform and the new standing repo facilities help reduce risk, but they’re untested in acute stress. MMF assets have doubled in five years, which could expand repo debt, and high-frequency traders can suddenly flee.
*****
October 31, 2024: According to the U.S. Treasury, repos with US Treasuries as collateral are themselves among the most prevalent collateral for stablecoins, Finadium reported.
*****
NOVEMBER
November 6, 2024: Repo is “the oil in the wheels of financial markets” and centrally cleared repo is an increasing priority for firms with cash to lend, said the CEO of Eurex Clearing, a major European clearing firm.
*****
November 12, 2024: The Standing Repurchase Facility, which the Fed restarted in 2021, is proving to be an important tool to help the Fed control short-term interest rates, especially on the repurchase market, said Roberto Perli, manager of the New York Fed’s System Open Market Account.
*****
November 14, 2024: Dealers relend 65% of the collateral they get when they make a repo loan and they’re exposed to counterparty, collateral and maturity risk, the Office of Financial Research reported in the first-ever in-depth look at repo flows, which play a pivotal role in the U.S. financial system.
*****
November 18, 2024: Companies are far from being able to implement the SEC’s mandate for central clearing of repo transactions collateralized with U.S. Treasuries, which is “one of the most significant shifts in US capital markets for decades,” according to a survey by Accuit and ION firms of senior executives involved.
*****
November 18, 2024: For 15 years the Financial Stability Board has been recommending ways to stabilize financial markets, but serious threats remain, especially in shadow banking, and regulators need to do a better job of implementing recommendations, the board said in its 2024 annual report.
*****
November 19, 2024: The Fed’s Standing Repo Facility is limited to uncleared client-to-dealer tri-party transactions and will not be able to soothe broader turbulence in the market, according to Barclays Plc strategist Joseph Abate reported by Bloomberg.
*****
November 20, 2024: Wide bank interconnections with non-banks continue to “present risks and vulnerabilities to the global banking system,” said the Basel Committee on Banking Supervision. Next month it will publish guidelines on how banks should manage problems “exposed in recent episodes of (non-bank) distress.”
*****
November 20, 2024: Banks and non-banks (including money market funds, hedge funds, private lenders, real estate investment trusts and securities dealers) are exposed to the risk of losses through their wide interconnectedness, especially in the repo markets, said the Office of Financial Research in its 2024 Annual Report to Congress.
*****
November 20, 2024: The largest European banks, especially the French, get up to a third of their money via overnight repo loans from U.S. financial institutions and have dramatically increased lending much of it to non-banks outside of the Euro area, especially investment and pension funds, reported the European Central Bank. These banks also sell excess dollars into the highly concentrated foreign exchange swap market, a repo-like derivatives venue. These banks are vulnerable to financial shocks, which can be hard for regulators to foresee because the transactions are recorded off-balance-sheet, the report said.
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November 20, 2024: Recent crises have proved that the financial industry needs to be well- run and well-regulated, said Gabriel Makhlouf, governor of the Central Bank of Ireland, who worries that this consensus “is at risk of slipping.” History has proven that a “lighter touch” failed, causing “one of the most growth destructive events of the last century.” Good growth requires good regulation, he said. “We have all seen the profound costs that low standards in the financial sector can bring.”
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November 21, 2024: Even though they were the main cause of the crash of 2008, non-bank financial institutions have grown from $40 trillion to more than $100 trillion over the past 20 years and make up the majority of the U.S. financial sector, reported the New York Fed. The Financial Stability Oversight Council oversees this risk, the report said.
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November 21, 2024: Major banks are questioning the safety of synthetic risk transfers, a form of insurance that is rising at a record pace, Bloomberg reported. Investors often buy SRTs from banks using repo loans or other debt from other banks, potentially causing dangerous feedback loops within banking, regulators said.
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November 21, 2024: The rates on year-end overnight repos collateralized with U.S. Treasuries or mortgage-backed securities is soaring, sending unusually early warnings of potential risk at year end, Bloomberg reported. The Fed’s Standing Repo Facility, which only serves part of the market, will likely not be helpful, an official said.
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November 21, 2024: Switzerland is celebrating “something very special,” the 25th anniversary of the Swiss repo market, said two directors of the Swiss National Bank. The Swiss repo market is “among the most advanced and efficient repo markets in the world,” with one of its key advantages being the reduction of risks because transactions are collateralized with securities, they said.
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November 21, 2024: Two-thirds of financial institutions with total assets of at least $100 billion failed to meet all Fed standards in the first half of 2024, especially in managing interest rate risk and liquidity risk, said the Fed’s semiannual Supervision and Regulation Report.
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November 22, 2024: Leverage at life insurers and hedge funds are near decade highs, and money market and open-end mutual funds remain susceptible to runs, creating “notable vulnerabilities,” said the Fed’s semiannual Financial Stability Report.
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November 22, 2024: In the past year, estimated runnable debt grew about 7.5 percent, especially at money market funds and in repos, to more than $22 trillion, said the Fed’s semiannual Financial Stability Report.
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November 25, 2024: Giant European banks are once again increasing their repo loans from U.S. shadow bankers like money market funds, in a “remarkably silly regulatory arbitrage” that was “a bit of a disaster” when the European Debt Crisis hit in 2009, the Financial Times reported.
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November 25, 2024: A number of Republican officials and other conservatives say they want to do away with Basel III, the international banking standards that world leaders have been developing for 15 years, but what will be their alternative? asked Finadium editor Josh Galper. “That’s where things get dicey,” he said.
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November 26, 2024: A lot of work needs to be done before securities finance, especially repo, can be a major feature of the Middle East financial markets, and that work is underway, reported the Securities Finance Times.
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November 27 2024: In the Financial Stability Board’s list of systemic risk scores for 77 global banks, 11 of the 14 risk indicators hit all-time highs in 2023, reported Risk Quantum. The indicators refer to size, interconnectedness, complexity, substitutability, and cross-jurisdictional activity, Risk Quantum said.
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November 29, 2024: Releasing the results of its first UK financial system stress test, with more than 50 global financial firms participating, the Bank of England said it needs to work on increasing repo market resilience because many firms rely on it but it can dry up in a crisis, especially for shadow banks. The Bank of English is creating a repo facility for these shadow banks.
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DECEMBER
December 3, 2024: Michael J. Hsu, acting U.S. Comptroller of the Currency, said efforts to force a rollback of the Basel Endgame capital requirements for banks could seriously weaken bank regulation and launch a “race to the bottom,” reported The Banker.
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December 3, 2024: Regional banks are increasingly adopting investment strategies of hedge funds characterized by opacity, deregulation and complex risk-taking that “are fundamentally at odds with the operational priorities of deposit-taking institutions, which emphasize stability, liquidity, and depositor trust,” said Barnard College economist Elham Saeidinezhad. This creates “inherent instabilities within the banking system,” she said.
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December 4, 2024: The lack of data for shadow bank operations is making it hard for the Financial Stability Board to assess vulnerabilities, the board reported. The board is continuing “substantial work” on shadow banks and will soon release final recommendations on how to deal with stability risks from shadow bank leverage.
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December 4, 2024: The European Union must deal with vulnerabilities in money market and investment funds and work toward central clearing of repos, which are critical for the financial system and the growing non-bank sector but have experienced episodes of dysfunction in recent years, said the European Systemic Risk Board.
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December 4, 2024: 55% of people interviewed consider the probability of a high-impact systemic event in the global financial system in 2025 to be high or very high, said the Depository Trust & Clearing Corporation as it released its annual Systemic Risk Barometer Survey. Chief worries are geopolitical conditions, cybersecurity and emerging technologies like AI.
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December 5, 2024: Central clearing for repos is probably going to grow, said the Finadium Editorial Team. That’s because all firms need liquidity but not every firm can get it at the right time and the right price, and central counterparties can help with that.
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December 5, 2024: Central counterparty (CCP) deposits with the Fed have surged since first permitted in 2015 and will “increase markedly” in 2025 when repos collateralized with U.S. Treasuries must be centrally cleared, said a Fed report. The Fed needs to plan ahead to accommodate the volatile nature of these deposits, the study said. Key CCPs are the Fixed Income Clearing Corporation, the Options Clearing Corporation and the Chicago Mercantile Exchange Inc.
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December 6, 2024: “Even within a transparent and easily accessible asset class like gilts,” fire sales are a danger, especially if contracts and operating arrangements restrict quick flows of funds, as shown in the LDI crisis, said a Bank for International Settlements working paper. An investigation is needed into why LDIs didn’t structure to prevent such a crisis, authors said.
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December 9, 2024: In the future the Bank of England will stabilize the financial markets through repo transactions instead of buying and selling securities, it said. Banks, building societies, broker-dealers, and central counterparties can participate. Collateral can include sovereign debt, residential mortgages, consumer and corporate loans, and asset-backed securities.
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December 9, 2024: “The capital many central clearingparties use to incentivize good risk management is remarkably thin – and not directly correlated to the level of risk in the system. Given the systemic nature of central counterparties, it seems many of them are too thin-skinned,” wrote Joshua Walker at Risk.net.
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December 10, 2024: If central counterparties – required for derivatives and soon for repo with Treasury collateral – can simply cancel hours of trades at will, as the London Metal Exchange did two years ago, this raises doubts about a central counterparty’s interest in financial stability, ensuring contract performance for both buyer and seller and treating both equally, preventing defaults, avoiding risky trades, and maintaining ample capital, wrote the Office of Financial Research.
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December 10, 2024: The biggest threat to global financial stability is soaring government debt, especially in the U.S., said Claudio Borio, a senior official with the Bank for International Settlements. When investors decide they don’t want all that debt, expect turmoil in financial
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December 10, 2024: Signs of serious market distress in 2020, 2021 and twice in 2022 underscore how important it is for non-bank financial institutions to plan for unexpected margin and collateral calls in their derivatives and securities activities like repo, said the Financial Stability Board. It proposes eight steps non-banks must take to promote market stability.
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December 10, 2024: “Urgent action” is needed on five “unresolved issues” regarding the SEC mandate that repos with Treasury collateral be centrally cleared by June 30, 2026, said the CEO of the Securities Industry and Financial Markets Association. Central clearing is a “significant change” that could cause “disruptions” and must be carefully managed, he said.
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December 13, 2024: Societe Generale, a major international bank, said it has conducted the first-ever repo transaction on blockchain with a European central bank, the Banque de France. The “pioneering deal” is an important step in “building innovative financial markets,” the bank said.
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December 16, 2024: Assets at non-bank financial institutions increased 8.5% globally to 49.1% of global financial assets in 2023, more than double bank growth, said the Financial Stability Board. The sector of non-banks that borrows short and lends long, like banks do, grew 9.8% to reach a record $70.2 trillion, the report said. Borrowings and interconnectedness with banks also increased.
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December 16, 2024: Risk.net has joined the chorus raising awareness of a growing, complex new structure that lets derivatives dealers offload risk to investors, similar to credit default swaps that caused such ruckus in 2008.
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December 17, 2024: Investors worry that the interest rate on repo loans could soar and cause market turmoil around year-end if supply (that is, those who want to borrow) exceeds demand (those with cash to lend), the Financial Times reported. Cash is particularly tight at this time, investors said.
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December 18, 2024: Leverage, or excessive borrowing, at non-bank financial institutions like hedge funds, other investment funds, pension funds and insurance companies, amplified by factors like interconnectedness, played a key role in financial market crises in March 2020, March 2021, and 2022. Authorities need to develop policies to address this significant risk, said the Financial Stability Board.
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December 20, 2024: As more repo moves to central clearing, dealers are likely to use more sponsored repo, where dealers can obscure their exposure to money market funds and hedge funds, the dominant traders, said a report by New York Fed staff.
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December 23, 2024: Money market fund holdings have soared to “nosebleed levels, north of $6.67 trillion,” largely by luring deposits from banks, the Wall Street Journal reported, and almost $2.3 trillion is invested in sponsored repo deals through dealers, said the Office of Financial Research.
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December 23, 2024: Traders are questioning the effectiveness of the Fed’s Standing Repo Facility, which lets banks and primary dealers borrow when cash is tight, prompting the Fed to consider changes, reported Bloomberg.
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December 30, 2024: Smooth function of the repo market and investor confidence in U.S. Treasuries require plenty of traders obligated to buy treasuries as they’re issued, but swelling U.S. debt and tighter regulations after 2008 increase the likelihood of a shortfall and a repeat of the 2019 crisis, Bloomberg reported.
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Mary—
Once again, you’ve shown your relentless dedication when it comes to pointing out fragility and danger in the financial markets. And that worry and handwringing won’t change a thing. It is nothing short of insane that repo is a mystery to many and unknown by millions more even in the wake of the 2008 crisis. “Nothing to see here…” Thank you for not giving up.