We’ve completed an analysis on the last three months of data from DTCC’s GCF Repo(R) index and BNY Mellon’s tri-party repo index, focusing on US Treasuries. The spread on these two indices is wide on a good day and was immense at quarter end. What does this mean for understanding best execution in the repo markets?
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An alternative explanation is that the spread represents a credit transformation fee. Why would broker dealers sell collateral in the GCF market if the money market is trading 40 basis points lower? The simple answer is that dealer does not have access to the money markets either because of lack of coverage or more probably because of poor credit. Other dealers (with excess capacity) are willing to fund the weaker dealers if there is a profit in it, hence day to day they charge an average of 40 bps for that service. At quarter end two things happen, First, those cash rich dealers may cut back on their funding of other dealers in order to ‘dress’ their own balance sheet and second, other members of the dealer community use the GCF market to net down their inter bank trades and ‘dress’ their balance sheets. This ‘arb’ has always existed. what is surprising is the spread in it at the present time.