The New Face of the Repo Market for Investors, Dealers and Clearers
Finadium Research Report
The New Face of the Repo Market for Investors, Dealers and Clearers
Finadium
July 2011
The repo market is central to the business of funding assets on Wall Street, and yet it has kept a remarkably low profile until the last two years. Today, articles in the press link repo to the role of the shadow banking industry in the recent financial crisis. Meanwhile, US regulators are publicly seeking to de-risk the business, and this process has already begun with the implementation of several recommendations on tri-party repo market reform, all strongly supported by the Federal Reserve. As with all regulatory initiatives however, new winners and losers will emerge that will change the face of the industry.
Clearing agents, broker/dealers and cash investors in repo products, including money market funds, pension plans and corporations, all have strong vested interests in the success of the repo market. While clearing agents play a role as neutral intermediaries, broker/dealers rely on repo for vast amounts of funding for their daily business activities; a lack of access to repo funding can mean going out of business. Cash investors use repo as a low-risk investment product on both an overnight and term basis, relying first on the credit of their counterparty that the trade will be unwound successfully, and second on the underlying collateral. All three groups, as well as regulators, are seeing the information they have available and the balance of power shift in this critical marketplace.
This report provides an analysis of what reforms in the repo market will mean for clearing agents, dealers and cash investors over the next 18 months. It evaluates both bilateral and tri-party repo markets with an emphasis on collateral management and the impacts of the 2010 US tri-party repo reforms.
The report has been written with the financial services professional in mind and presumes a reasonable amount of experience with collateral management and related topics. It should be read by repo market professionals looking to hear the opinions of their peers and by financial professionals in general looking for a greater understanding of changes impacting the repo markets. For cash investors, the report provides a sophisticated view of how changes will affect collateral acceptance, oversight and risk management.
This report is 38 pages with 12 exhibits.
TABLE OF CONTENTS
■ Executive Summary
■ The Road to Reform
– Sizing the Repo Market
■ The Repo Funding Cycle and Collateral Management
– The Unwind/Rewind Dilemma
– Repo, Systemic Risk and Collateral Arbitrage
■ The Tipping Point: Repo Meets Subprime
■ What Repo Reform Means to Market Participants
– Major Impacts of the Task Force Recommendations
– The Cost to Dealers of Intraday Credit and Capital Charges
– And Now for the Cash Investors
– Looking at Pricing Sources
■ The Balance of Power and Collateral in the Reformed
Tri-party Repo Market
– What Reform Will Not Do
■ About the Author
■ About Finadium