Beyond the Bulge: Foreign Banks and Smaller Dealers in US Repo

Finadium
June 2018

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The focus on balance sheet and return on capital constraints faced in the repo business by bulge bracket US banks has often drowned out the vitality of foreign and non-bank players. This Finadium research report focuses on the challenges and opportunities faced by foreign and non-bank US repo market participants.

Foreign banks have always been a fixture in the US repo markets, but the emergence of highly levered non-banks is fairly recent. Foreign banks and non-bank independent dealers have taken advantage of wider spreads in the market as bulge bracket banks stepped back. But there is evidence that this trend may have runs its course as larger banks dedicate more balance sheet to securities financing, pushing down spreads in the process.

The DTCC’s Fixed Income Clearing Corporation (FICC) is driving one of the most important new developments, the Capped Contingency Liquidity Facility® (CCLF), which will alter market structure and the flow of liquidity and collateral in US markets. All market participants will feel the impact of the CCLF, but smaller non-bank dealers may be most affected on a daily basis. CCLF requirements are expected to go live in November 2018.

This report should be read by repo market participants across the sell-side and buy-side and by financial market participants more broadly. Our discussion of foreign and smaller non-bank dealers is relevant for directly impacted firms, competitors, clients, and anyone interested in US repo market liquidity. While this used to be a small audience, the introduction of the Secured Overnight Funding Rate (SOFR) means that repo liquidity now has implications for pricing and stability in other financial markets.

Table of Contents

• Executive Summary
• Divergent Interests in US Repo Markets
• Big Foreign Banks with a Strong Hand
• Small Dealers Playing to Their (Non-bank) Strengths
  – Small Dealers Focus on Specific Markets
• CCLF: The Elephant in the Room
  – How Will Dealers Meet Their CCLF Obligations?
• Where the Market Goes from Here
  – A CCLF Workaround
  – Revisions to Dodd-Frank and the Upcoming NSFR
• About the Author
• About Finadium LLC