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The Intersection of U.S. Money Market Mutual Fund Reforms, Bank Liquidity Requirements, and the Federal Home Loan Bank System
The most recent changes to money market fund regulations have had a strong impact on the money fund industry. In the months leading up to the compliance date of the core provisions of the amended regulations, assets in prime money market funds declined significantly, while those in government funds increased contemporaneously. This reallocation from prime to government funds has contributed to the latter's increased demand for debt issued by the U.S. government and government-sponsored enterprises. The Federal Home Loan Bank (FHLBank) System played a key role in meeting this heightened demand for U.S. government-related assets with increased issuance of short-term debt. The FHLBank System uses the funding obtained from money market funds to provide general liquidity to its members, including the largest U.S. banks. Large U.S. banks' increased borrowings from the FHLBank System are motivated, in large part, by other post-crisis regulations, specifically the liquidity coverage ratio (LCR). The intersection of money market mutual fund reforms and the LCR have contributed to the FHLBanks' increased reliance on short-term funding to finance relatively longer-term assets, primarily collateralized loans to its largest members. This funding model could be vulnerable to "runs" and impact financial markets and financial institutions in ways that are difficult to predict. While a funding run seems unlikely, it is often the violation of commonly held conventions that tend to pose financial stability risks. Indeed, runs on leveraged financial intermediaries engaged in maturity transformation have produced systemic risks issues in the past and are worthy of investigation and continuous monitoring.
AUTHORS: Baklanova, Viktoria; Anadu, Ken
Reference guide to U.S. repo and securities lending markets
This paper is intended to serve as a reference guide on U.S. repo and securities lending markets. 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 2007-09 financial crisis. The paper then discusses vulnerabilities in the repo and short-term wholesale funding markets and the efforts to limit potential systemic risks. It next provides an overview of existing data sources on securities financing markets and highlights specific shortcomings related to data standards and data quality. Lastly, the authors discuss a near-term agenda to help fill some of the data gaps in repo and securities lending markets.
AUTHORS: McCaughrin, Rebecca; Baklanova, Viktoria; Copeland, Adam
A pilot survey of agent securities lending activity
This paper reports aggregate statistics on securities lending activity based on a recently concluded pilot data collection by staff from the Office of Financial Research (OFR), the Federal Reserve System, and staff from the Securities and Exchange Commission (SEC). In its annual reports, the Financial Stability Oversight Council identified a lack of data about securities lending activity as a priority for the Council. This pilot data collection was a step toward addressing this critical data need. The voluntary pilot collection included end-of-day loan-level data for three non-consecutive business days from seven securities lending agents. Most but not all participating lending agents were subsidiaries of banks. The dataset of 75 reporting fields provides substantial new information about securities lending activity, including information concerning securities owners, securities borrowers, attributes of securities loans, collateral management, and cash reinvestment practices. However, the pilot data collection was limited in scope and duration. Comprehensive data are still lacking. To close this data gap, a permanent collection of data covering securities lending activity is recommended by the Council.
AUTHORS: Baklanova, Viktoria; Keane, Frank M.; Porter, Burt; Caglio, Cecilia
The use of collateral in bilateral repurchase and securities lending agreements
We use unique data from U.S. bank holding company-affiliated securities dealers to study the use of collateral in bilateral repurchase and securities lending agreements. Market participants? use of collateral differs substantially across asset classes: for U.S. Treasury securities transactions, we find that haircuts are large enough to provide full protection from default, whereas the same is not usually true for equities transactions. Further, although most of the equities in our sample are each associated with a unique haircut, most of the U.S. Treasury securities are each associated with more than one haircut. We relate these findings to implications of the zero value-at-risk feature that can be found in theories of collateral as an enforcement mechanism, and show that the data do not confirm these implications. We then turn to models of adverse selection that predict a negative relationship between haircuts and interest rates, based on the use of collateral as a screening mechanism. We find this negative relationship only for those trades in which the securities dealers are receiving U.S. Treasury securities and delivering cash.
AUTHORS: Baklanova, Viktoria; Caglio, Cecilia; Cipriani, Marco; Copeland, Adam