May 2022

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US repo and money markets are entering an untested era. The Federal Reserve is raising interest rates and beginning the process of Quantitative Tightening, all while keeping ample reserves. New programs like the Standing Repo Facility should place a cap on repo rates, so long as the market is comfortable avoiding the stigma of actually using it. And the $1.7-$1.9 trillion held by the Federal Reserve’s Reverse Repo Facility (RRP) may start to find other investments once market rates and collateral liquidity are attractive enough to warrant a change.

An assumption in this transitional time is that repo activity will gravitate away from the RRP and towards US repo dealers, including the 25 primary dealers and many smaller broker-dealers. Theoretically, higher benchmark interest rates and more collateral in the system should push what dealers are willing to pay for financing above the RRP rate, and spreads may widen beyond the sub-one basis point range they were through 2021. This in turn could reignite the private sector repo markets that have been in competition with the Fed’s own repo offerings for the last two years.

But will it happen this way, and who stands to benefit as a result? The needs and risk appetites of the major dealers have shifted along with changing regulations and market conditions. Smaller dealers have the interest but may not have the capacity to meet large cash investors. And CCP cleared client business, guarantees and Peer to Peer (P2P) may finally have a reason to move past a niche offering into the mainstream.

This report should be read by any market participant with an interest in US money markets, including cash investors, dealers, market infrastructures, regulators and their advisors.

Table of Contents

  • Executive Summary
  • Repo Market Puzzle Pieces
  • Repo Conditions through March 2022
  • Projecting Dealer/Client Financing Needs
    • – Expecting Changes to Client Demand
    • – Who Has the Collateral?
    • – Government Issuance and the Reversal of QE
    • – Sources and Uses
  • Opportunities for New Repo Models
  • About the Author
  • About Finadium LLC

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