Introducing the Revised Broad Treasuries Financing Rate
The Federal Reserve Bank of New York, in cooperation with the Office of Financial Research, is proposing to publish three new overnight Treasury repurchase (repo) benchmark rates. Recently, the Federal Reserve decided to modify the construction of the broadest proposed benchmark rate (the other two proposed rates are expected to remain unchanged; see the Bank?s announcement on May 24). In this post, we describe the changes to this rate in further detail. We compare this revised rate to the originally proposed benchmark rate and show that, in the post-liftoff period, it trades higher, on ...
Excess Funding Capacity in Tri-Party Repo
Security dealers sometimes enter into tri-party repo contracts to fund one class of securities with the expectation they will wind up settling the contract with higher quality securities. This strategy is costly to dealers because they could have borrowed funds at lower rates had they agreed to use the higher-quality securities at the outset. So why do dealers do this? Why obtain or arrange excess funding for the initial asset class? In this post, we discuss possible rationales for an excess funding strategy and measure the extent of excess funding capacity in the tri-party repo market. In a ...
The Cost and Duration of Excess Funding Capacity in Tri-Party Repo
In a previous post, we showed that dealers sometimes enter into tri-party repo contracts to acquire excess funding capacity, and that this strategy is most prevalent for the agency mortgage-backed securities (MBS) and equity asset classes. In this post, we examine the maturity of the repos used to pursue this strategy and estimate the associated costs. We find that repos that generate excess funding capacity for equities and corporate debt have longer maturities than the average repo involving either of these asset classes. Furthermore, the premiums dealers pay to maintain excess funding ...
Do You Know How Your Treasury Trades Are Cleared and Settled?
The Treasury Market Practices Group (TMPG) recently released a consultative white paper on clearing and settlement processes for secondary market trades of U.S. Treasury securities. The paper describes in detail the many ways Treasury trades are cleared and settled? information that may not be readily available to all market participants?and identifies potential risk and resiliency issues. The work is designed to facilitate discussion as to whether current practices have room for improvement. In this post, we summarize the current state of clearing and settlement for secondary market Treasury ...
What Can We Learn from the Timing of Interbank Payments?
From 2008 to 2014 the Federal Reserve vastly increased the size of its balance sheet, mainly through its large-scale asset purchase programs (LSAPs). The resulting abundance of reserves affected the financial system in a number of ways, including by changing the intraday timing of interbank payments. In this post we show that (1) there appears to be a nonlinear relationship between the amount of reserves in the system and the timing of interbank payments, and (2) with the increase in reserves, smaller banks shifted their timing of payments more significantly than larger banks did. This result ...
Are New Repo Participants Gaining Ground?
Following the 2007-09 financial crisis, regulations were introduced that increased the cost of entering into repurchase agreements (repo) for bank holding companies (BHC). As a consequence, banks and securities dealers associated with BHCs, a set of firms which dominates the repo market, were predicted to pull back from the market. In this blog post, we examine whether this changed environment allowed new participants, particularly those not subject to the new regulations, to emerge. We find that although new participants have come on the scene and made gains, they remain a small part of the ...
The Value of Opacity in a Banking Crisis
During moments of heightened economic uncertainty, authorities often need to decide on how much information to disclose. For example, during crisis periods, we often observe regulators limiting access to bank‑level information with the goal of restoring the public's confidence in banks. Thus, information management often plays a central role in ending financial crises. Despite the perceived importance of managing information about individual banks during a financial crisis, we are not aware of any empirical work that quantifies the effect of such policies. In this blog post, we highlight ...
Repo and securities lending
We provide an overview of the data required to monitor repo and securities lending markets for the purposes of informing policymakers and researchers about firm-level and systemic risk. We start by explaining the functioning of these markets and argue that it is crucial to understand the institutional arrangements. Data collection is currently incomplete. A comprehensive collection would include, at a minimum, six characteristics of repo and securities lending trades at the firm level: principal amount, interest rate, collateral type, haircut, tenor, and counterparty.
The tri-party repo market before the 2010 reforms
This paper provides a descriptive and quantitative account of the tri-party repo market before the reforms proposed in 2010 by the Task Force on Tri-Party Repo Infrastructure (Task Force 2010). We provide an extensive description of the mechanics of this market. We also use data from July 2008 to early 2010 to document quantitative features of the market. We find that both the level of haircuts and the amount of funding were surprisingly stable in this market. The stability of the margins is in contrast to evidence from other repo markets. Perhaps surprisingly, the data reveal relatively few ...
The production impact of "cash-for-clunkers": implications for stabilization policy
Stabilization policies frequently aim to boost spending as a means to increase GDP. Spending does not necessarily translate into production, however, especially when inventories are involved. We look at the ?cash-for-clunkers? program that helped finance the purchase of nearly 700,000 vehicles in 2009. An analysis of auto sales and production movements reveals that the program did prompt a large spike in sales. But the program had only a modest and fleeting impact on production, as inventories buffered the movements in sales. These findings suggest caution in judging the efficacy of such ...