Explaining the U.S. tri-party repo market
During the 2007-09 financial crisis, it became apparent that weaknesses existed in the design of the U.S. tri-party repo market that could rapidly elevate and propagate systemic risk. This article describes key mechanics of the market, focusing on two that have contributed to its weaknesses and impacted market reform efforts: the collateral allocation and ?unwind? processes. The authors explain that collateral allocation in the tri-party repo market involves considerable dealer intervention, which can slow settlement processing. The length of time required to allocate collateral has in fact ...
An empirical analysis of the GCF Repo® Service
This article examines how dealers use the GCF Repo service. It begins by explaining the strategies that dealers employ when trading GCF Repo and then uses empirical analysis to quantify the predominance of these strategies. Looking across all dealers and all days, the study finds that on an average day, at least 23 percent of dealers focus on strategies to raise cash and at least 20 percent focus on managing their inventory of securities. This activity involves using GCF Repo to both exclusively source collateral and perform collateral swaps.
Challenges in identifying interbank loans
Although interbank lending markets play a key role in the financial system, the lack of disaggregated data often makes the analysis of these markets difficult. To address this problem, recent academic papers focusing on unsecured loans of central bank reserves have employed an algorithm in an effort to identify individual transactions that are federal funds loans. The accuracy of the algorithm, however, is not known. The authors of this study conduct a formal test with U.S. data and find that the rate of false positives produced by one of these algorithms is on average 81 percent; the rate of ...
The financial plumbing of the GCF Repo® Service
The authors describe the ways that intraday credit was used to facilitate the settlement of trades before reforms to the tri-party repo settlement system. In particular, they focus on two main processes: the end-of-day settlement and the morning unwind. The authors then describe why this extension of intraday credit by the clearing banks is problematic, specifically pointing to concerns that a clearing bank may not be able to absorb the impact of a failing dealer. The authors also discuss various reforms to the tri-party repo settlement process, which, they note, are likely to influence the ...
Introduction [to A Primer on the GCF Repo® Service]
Repurchase agreements, or repos, are commonly used by financial entities to access money markets. GCF Repo, a financial service provided by the Fixed Income Clearing Corporation (FICC), is a particular type of repo in which trades are executed anonymously, with FICC acting as a central counterparty and guaranteeing settlement. In this primer, which consists of an introduction and two articles, the authors explore the effects on GCF Repo of ongoing reforms to the settlement procedures for another type of repo, tri-party repo. Key areas of focus are the impact of the reforms on the use of ...
Everything You Wanted to Know about the Tri-Party Repo Market, but Didn't Know to Ask
The tri-party repo market is a large and important market where securities dealers find short-term funding for a substantial portion of their own and their clients’ assets. The Task Force on Tri-Party Repo Infrastructure (Task Force) noted in its report that “(a)t several points during the financial crisis of 2007-2009, the tri-party repo market took on particular importance in relation to the failures and near-failures of Countrywide Securities, Bear Stearns, and Lehman Brothers.” In this post, we provide an overview of this market and discuss several reforms currently under way ...
Cash Assets of Foreign Banks: An Example of Seasonal Adjustment Gone Awry
Federal Reserve Statistical Release H.8 provides aggregate data on the assets and liabilities of commercial banks in the United States. Two types of data are provided: one in which each series is adjusted to offset regular, seasonal movements, and another in which no adjustment is made. Recently, a striking pattern has emerged in one particular data series: the cash assets of foreign-related banking institutions. In the seasonally adjusted data, this value has fallen 36 percent since its peak in June 2011?a sharp movement that has generated concern among market observers. The nonseasonally ...
Mapping and Sizing the U.S. Repo Market
The U.S. repurchase agreement (repo) market is a large financial market where participants effectively provide collateralized loans to one another. This market played a central role in the recent financial crisis; for example, both Bear Stearns and Lehman Brothers experienced problems borrowing in this market in the period leading up to their collapse. Unfortunately, comprehensive and detailed data on this market are not available. Rather, data exist for certain segments of the repo market or for specific firms that operate in this market (see this recent New York Fed staff report). The ...
Income Evolution at BHCs: How Big BHCs Differ
As noted in the introduction to this series, over the past two decades financial intermediation has evolved from a traditional, bank-centered system to one where nonbanks play an increasing role. For my contribution to the series, I document how the sources of bank holding companies? (BHC) income have evolved. I find that the largest BHCs have changed the most; they?ve shifted their mix of income toward providing new financial services and are earning an increasing share of income outside of their commercial bank subsidiaries. In this post, I summarize my study?s key findings.
Intraday Liquidity Flows
Transactions denominated in U.S. dollars flow around the clock and around the globe, filling the pipelines that support commerce. On a typical day, more than $14 trillion of dollar-denominated payments is routed through the banking system. Critical to a well-functioning economy are the timing and smooth flow of dollars for large-value transactions and the infrastructure that enables that dollar flow. This financial market infrastructure provides essential economic services??plumbing? for the economy?and is made up of a variety of entities. In this post, we describe this financial market ...