Quarter-end is finally over, along with the hangover effect. Quarter-ends have always been crazy in the repo market, but with the addition of hundreds of regulations, suddenly month-ends also became important.
The historical pattern of repo dealers grossing UP their repo matched book balance sheets in-between quarter-ends and then shrinking them for quarter-ends is long gone. Instead, CCAR, and other regulations and reporting have caused certain dealers to have to report balance sheets daily, monthly, or quarterly.
Not everyone is on the same set of rules. It doesn’t help that we have Fed tightening expectations intertwined with quarter-ends. So, de-engineering what the GC Repo rate is pricing for quarter-end or for tightening becomes more difficult. So, although this quarter-end looked like it would be pretty tame, cash dried up and GC shot up to well over 2%.
However, it is slowly returning, as last week rates went from 2.11% down to 2.02%. As more cash returns to the repo market, the GC rate may come down further, but we do have another $112 billion in new Treasury supply coming, which should put a lower limit on how low that rate can go.
I see the repo and securities lending market as having changed in many permanent ways.
We traditionally had a credit intermediator, the broker/dealers (originally just the primary broker/dealers) and later prime brokers, who were the pipeline through their respective repo matched books for collateral providers to trade with cash providers, without the two sides ever knowing about each other or facing each other.
That lack of knowledge of the other side of the repo matched book came at a couple of costs, first, the bid/offer spread that went to the dealers and second, the defaults of the Financial crisis and the impact on some of the dealers that then cost their clients.
Clearly, with that pipeline becoming severely crimped by post-financial crisis regulatory reforms, consolidation and bankruptcies, and the resulting drop of about 60% in balance sheets being used for broker/dealer respective repo matched books, new pathways/pipelines needed to be found for cash provider and collateral provider clients. AVM’s Direct Repo™ was the first of one of such pathways.
Since then, other pathways to these markets have been created.
These include: the Federal Reserve’s RRP program with cash providers; peer-to-peer financing as reported on Treasury OFR’s website between MMFs and insurance companies; agent repo through sec lending agents and now some prime brokers; direct lending from beneficial owner to hedge funds who are short; indemnified as agent repo, buy-side to buy-side tri-party, repo through two international clearing organizations; electronic all-to-all repo on a few electronic trading platforms like Elixium and BNY DBVX; FICC’s sponsored repo and cleared repo products to entice certain sectors of the buy-side into that CCP, and other repo and/or sec lending CCPs (several still being worked on, particularly in Europe).
I believe this evolution will continue and eventually we will see all of these pathways used, including the traditional pathway (to probably a lesser than historical degree) through the broker/dealers and prime brokers.