At the end of 2018, most of the US repo market appears to be in good shape. New dynamics, including interdealer cooperation based on shared challenges and the successful management of balance sheet regulation, means that US repo markets are seeing a heightened degree of liquidity compared to five years ago. From a reputational and regulatory perspective, the introduction of the Secured Overnight Financing Rate (SOFR) backed by repo has brought positive new attention to the industry.
Healthy liquidity is expected going into 2019 but there are potential headwinds on the horizon, including the structural impacts of sponsored repo for the buy-side and increased market transparency in commoditized GC markets. The main challenges in the coming year are less on balance sheet and more related to spreads. The report investigates these themes, and concludes with projections for liquidity in 2019 that will impact large dealers, small dealers and their clients.
This report should be read by US repo market participants at dealers and cash investors looking for an end of year wrap up on the market, consolidated data on market activity, and insight on important market structure drivers. Related financial market participants, for example OTC derivatives traders that must organize a strategy for adopting the Secured Overnight Financing Rate (SOFR), may appreciate a deeper understanding of the mechanics that drive the new benchmark rate and how these may change in the coming year. Regulators and other market observers may benefit from the mix of data and market conversations reported here to find strategic directions for longer-term market evolution. This report is based on Finadium primary research and data collection, and discussions at our Rates & Repo conference in November 2018.
Table of Contents
- Executive Summary
- US Repo Market Segments
- Sponsored Repo: A Big Deal or a Passing Fad?
- – Who Is Sponsoring?
- Market Transparency
- – Transparency in Client Markets
- Liquidity Directions for 2019
- – Large Dealers
- – Small Dealers
- – Spreads, not Liquidity
- About the Authors
- About Finadium LLC