Finadium has conducted a survey of large institutional cash providers in the repo market to assess risk preferences and expectations on future market stability. The global repo market, sized by Finadium at US$13.78 trillion, continues to undergo adjustments due to bank funding regulations, low interest rates and the emerging need for collateral transformation trades.
Our survey shows that institutions remain interested in the repo market but are working to consider their risk parameters and alternatives as banks face pressures to move towards longer-term funding sources. There is currently a gap between the interests of many large cash repo providers and the requirements of bank repo dealers.
This report is based on two data sources. First, we conducted interviews with 31 large institutional investors in North America, Europe and Asia. Second, we collected data on repo transactions made by US institutional investors from 2007 to the present. These transactions were all executed in individually managed accounts; the credit and duration were set by the institutions themselves and were not subject to 2a-7 or other limitations. Our intention was to understand how, outside of money market funds or cash collateral managed by securities lending agents, institutions chose to invest their assets and what kinds of credit and maturity risk they would accept. In total, we gathered information from institutions with over US$2.8 trillion in assets.
Changing parameters for repo investing raise several what-if questions with institutional investors. For example, what if interest rates move into negative territory across more currencies? What if government bond repo becomes unprofitable? And what if overnight repo supply from dealers simply dries up and cash has nowhere to be effectively placed? These possibilities could all lead institutions to take on greater duration and/or credit risk in their repo pools. Institutional responses to these scenarios are discussed in the report.
This report has been written for institutional investors, their repo counterparties and service providers to help bridge the gap between institutional needs and the regulatory requirements that have pushed repo providers to make changes post-Lehman. For institutions, the report offers a peer-based analysis of repo investment criteria and thoughts going forward. For repo dealers and service providers, the report offers a candid look at the thinking of the large and important institutional investor cash provider market.
The press release and table of contents for this study is available here.