Sizing up repo arvind krishnamurthy, stefan nagel, and dmitry orlov nber working paper no. Monthly volume of the us gcf repo index rates and par amount, triparty repo rates and collateral values, and primary dealer financing transactions. Money market fund monitor office of financial research. In addition the content includes necessary supplementary material such as bank asset and liability management, trading techniques, and a range of other applications of value in the global money markets.
If you havent read the series, do check out the first book, as well as the digitalonly short story, the midnight dog of the repo man. The dealer sells the government securities to investors. However, we also document a sharp decline in the tri. Moneymarket funds finding new repo partners as dealers retreat. The site offers lenders, financial institutions and savvy buyers an easy way to make a connection and secure a deal promptly and effortlessly. Examples in this book will refer to all transactions from the dealers perspective. Federal reserve to collect data about repo and securities lending is expected to further those efforts. Repo remarketing auto repossession recovery management. Dealers typically run matched books, taking both sides of a trade and serving as an. In europe, a crucial funding market fears a yearend.
In other words, if you want to start on a particular chapter in the book, you should check out the code for the previous chapter. Lecture notes on risk management, public policy, and the financial. The money market fund delivers cash to the clearing bank, while the brokerdealer. Central banks around the globe have used their own repo markets to extend credit in tight markets. I didnt expect to say this, but repo madness is even better than the first novel in the series, the midnight plan of the repo man, which was excellent. Matchedbook repo trading is a lowmargin, balance sheetintensive business, however meaning it was one of the first areas to be cut when the us supplementary leverage ratio slr was introduced in september 2014. Matchedbook repo and the continued shadow crunch ft. Repo markets are an essential component of liquid government debt markets, acting as a transmission belt between money and debt markets, as well as serving to conduct key functions for the efficient operation of debt markets. A matched book is a risk management technique for banks and other financial.
Providing an efficient source of shortterm funding. The repo market 2 repos we often talk about buying and shorting securities. In the fixed income market, these transactions are accomplished with the use of the repo market. Repo market functioning iii preface repo markets play a key role in facilitating the flow of cash and securities around the financial system, with benefits to both financial and nonfinancial firms. The ofrs mmf monitor treats the treasury, governmentagency, and exempt government categories as government funds because of their similar asset composition. The concept of a matchedbook trade follows closely to that of a broker who takes both sides of an active trade, essentially having no market risk, only credit risk. Repomarketatooltomanageliquidity in financial institutions. The more profitdriven a repo desk appears to be, the more likely it will separated from treasury, as treasurys mandate of funding the bank is not profitdriven. Central banks around the globe have used their own repo markets to. Repo markets play a pivotal role in the worlds economy. Sizing up repo national bureau of economic research. The international repo and securities lending markets have attracted numerous participants including central banks, corporate cash managers, banks, pension funds, insurance companies, mutual funds and arbitrators. Banks use repo as one of a number of funding sources for routine operations. Repo and collateral markets lie at the heart of todays financial market system and are vital to its smooth functioning.
It was the key transmitter that carried the shock wave from the defaulting homeowner through the canyons of wall street to the american taxpayer. Today the global repo and securities lending markets provide users with a wide variety of. Funding via repo typically costs less than unsecured funding due to the collateralization. A bank is running a matched book when the maturities of its assets and liabilities are equally distributed.
Having said that, repo madness does stand on its own. A repurchase agreement, also known as a repo, rp, or sale and repurchase agreement, is a. It begins by presenting the institutional structure, and then describes the market landscape, the role of the participants, and other characteristics, including how repo and securities lending activity has changed since the 200709 financial crisis. These traders have been traditionally known as matchedbook repo traders. Feb 07, 2011 repo financing is a form of borrowing that facilitates the carrying of inventory in securities markets. Covering the repo market and shadow banking from the donald w. If the cash borrower defaults, the cash lender can recover value by selling the collateral, so it is a lessrisky form of lending and therefore less expensive. We show that the lehmans triparty repo book decreased dramatically just days before the holding company declared bankruptcy.
Tripartygcf repo data visualizations federal reserve bank of new york. A repo is a financial contract that resembles a collateralized loan. Collateral for repos one feature of japans repo market, as compared to major overseas markets, is that more than 90% of bond repos uses jgbs chart 4. The amount and terms of the trade are mutually agreed upon. The focus of this paper is to study repo as a means to intermediate funds between cash lenders and cash borrowers. The dealer sells the underlying security to investors and, by agreement between the two parties, buys them back shortly afterwards, usually the following day, at a slightly higher price.
In europe, the repo market is mainly interbank market participants are more homogeneous and tend to trade on both sides of the market ccps play an important role substitution between secured repo and unsecured interbank market in the u. This has significant implications for both financing, of business and governments. It usually refers to transactions in the bond markets but there are similar activities in equity markets as well. If a bank maintains a matched book, it can oversee its liquidity and. Mary fricker, founder of, said the repurchase market is a key reason for the ferocity of the financial crisis. That comes as dealers matchedbook repo, where banks rely on repurchase agreements and securities lending to fund clients while using the same collateral and terms to borrow themselves, falls. Repo market sees a lending shift as rules bite wsj. Our core focus is sales of used cars, vans, trucks, and other preowned vehicles. Repo and securities lending markets provide attractive options to both the cash investor and. G01,g21,g24 abstract we measure the repo funding extended by money market funds mmf and securities lenders to the shadow banking system, including quantities, haircuts, and repo rates by type of underlying collateral. In europe, a crucial funding market fears a yearend freeze.
The repurchase repo market was a key channel through which the global financial crisis was transmitted. The financial market crisis witnessed the demand for quality collaterals as. So, if repo is borrowing money by giving securities as a collateral, reverse is lending. Us gcf repo index, triparty repo, and primary dealer. Repo remarketing provides a trustworthy bridge to efficiently manage the. Impacts of the net stable funding ratio on repo and collateral markets abstract. The dealer does so to capture the spread at which it enters intoa repurchase agreement i. Determinants of the repo rate in global money markets. A repurchase agreement, also known as a repo, rp, or sale and repurchase agreement, is a form of shortterm borrowing, mainly in government securities. A repurchase agreement, or repo, is a sale of securities for cash with a commitment to repurchase them at a specified price at a future date. The triparty repo process step 1 step 2 step 3 step 4 repo transaction takes place between money market fund and brokerdealer. Two appendixes provide additional analysis on the term structure of repo spreads and on how repo rates affect the computation of forward prices and tests of the expectations hypothesis.
But it is important to note that the main function of some repo markets is to intermediate collateral. But sometimes, in a financial crisis, demand for market liquidity overwhelms supply. The repo handbook securities institute global capital. Impacts of the net stable funding ratio on repo and. The repo market is pivotal to the efficient working of almost all financial markets. Its importance reflects the wide range and fundamental nature of repo s applications. Even if repos and securities lending that use securities other than bonds. Matchedbook repo and the continued shadow crunch ft alphaville. Repo market functioning bank for international settlements. Provided the asset being used as collateral is liquid, the buyer should be able to refinance himself at any time during the life of a repo by selling or repoing the assets to a third party he would, of course, subsequently have to buy the same or a similar asset back in order to return it to his repo counterparty at the end of the repo. In addition to using repo as a funding vehicle, repo traders make markets. However, given that funding is usually the driver of matched book repos, it is not clear whether it should relate to cash market liquidity. Reynolds national center for business journalism at arizona state university.
Hedge funds can use repos to borrow the assets they need to cover their short positions, which are bets that the price of an asset will fall. The future of wholesale funding markets bny mellon. In reality, the treasury function, which ill roughly define as unsecured funding, can be very profitable and generally uses the same style of trading as repo matched book trading. Indeed, repo is the primary source of funding for such institutions. In short, a combination of the maturity mismatch i. Repo remarketing is a leading service provider for credit unions and other financial institutions. While the relationship between unsecured and secured funding has broken down at lower bound, treasury and repo are similar in most respects. The canadian repo market is primarily composed of large banks and large investment institutions such as pension funds. The repo handbook, second edition presents an overview of repo vehicles and markets with sufficient depth for those seeking detailed explanations. Moneymarket funds finding new repo partners as dealers. Repo repo involves lending bonds and borrowing cash on the initial leg and paying back the cash plus interest and receiving bonds. These include, among others, credit risk management, funding debt portfolios, playing the yield curve, and covering. It is used to support the funding needs of financial institutions and to procure on a temporary basis specific securities. Funding investments finance 238738, spring 2008, prof.
Repowatch watching for the next financial crisis by. Flexible shortterm funding is important to fixedincome marketmaking as it enables market. A dealer runs a matched book by simultaneously entering into a repo and a reverse repo for the same collateral with the same maturity. She shares her tips and resources for covering the topic in this coverage guide. Repo is a crucial financial market in the united states because it is a. Oct 18, 2017 the repo market is used by a number of sectors. Security dealers as money dealers, matched and speculative book. Covering the repo market and shadow banking repowatch.
Ecb surveys, icma surveys clearstream banking, euroclear bank jp morgan ecb money market contact group. Currently, matchedbook repo traders employ other profit strategies, such as nonmatched maturities, collateral swaps, and liquidity management. Feb 24, 2017 each chapter in the book has its own branch, which contains all the commits for that chapter. A matched book is one way a financial institution can reduce its risk because a matched book does not add to its liabilities. Bilateral repos are also common in the interdealer market, either as a source of funding or as a way to obtain specific securities. A well functioning repo market also supports liquidity in other markets, thus contributing to the efficient allocation of capital in the real economy. So, the state of the code in a branch is the state of the code at the end of that chapter. The book features an introduction to the structure and mechanics of repo, institutional practices and realworld examples.
Repowatch watching for the next financial crisis by keeping. This paper is intended to serve as a reference guide on u. Repo financing is a form of borrowing that facilitates the carrying of inventory in securities markets. Instead, funding was mostly stable during and after the crisis period, except in rare cases when funding dropped precipitously. These funds invest most of their assets in cash, government securities, and repurchase agreements repos backed by these securities. Each chapter in the book has its own branch, which contains all the commits for that chapter. Repo is particularly attractive to institutions that are already highly leveraged e. By being able to offer deposits secured by legal title to highquality liquid assets hqlas and diversification to. Moreover, the hedge fund cannot borrow directly from the money market fund sector in the triparty repo market, because the money funds are not. The funding shortfall forced investors to sell assets which resulted in further decline in asset prices, creating a vicious cycle. Banks mediate, building up vast books of offsetting trades, and also use the market to meet their own shortterm funding needs.
This is a reverse repo and is structured as a purchase of the bond with an agreement to resell it to the customer the next day at a lower price that factors in the customers interest expense. Jun 10, 2015 that comes as dealers matchedbook repo, where banks rely on repurchase agreements and securities lending to fund clients while using the same collateral and terms to borrow themselves, falls. For example, bear stearns lost billions of dollars in repo funding in two days in march 2008. With activity in these markets now recovering, pressure is mounting for regulators elsewhere to increase the resilience of repo markets so that they become a more stable source of funding during periods of market stress. Repo, then, was the main way that defaults in the housing market became a full blown credit panic. A situation in which the funds a bank or brokerage has borrowed equal the funds it has lent to customers, where both borrowed and lent funds have the same maturity. In this paper, we aim to build a model that directly links repo markets with cash market liquidity by modeling how dealers use repo to. Secured funding has become a critical tool since the crisis introduction 2 a repurchase agreement repo is the sale of securities together with an agreement for the seller to buy back the securities at a later. The repo market is an important source of funds for large financial institutions in. Instead, it was the repo lenders who had no skin in the game. The problem was acute as a major part of the repo market used nonsovereign papers for the repo transaction. A matched book is one way a financial institution can reduce its risk because a matched book does not add to. Repos and dealers a repurchase agreement, or repo, can be thought.
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