December 2019

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The US repo market volatility experienced on September 16, 2019 put the problem of liquidity regulation into sharp focus. Previously, there had been little question that rising US Treasury issuance was meeting bank balance sheet capacity limits. But a series of technical events, several of which were known in advance, showed that breaking points were real. Going into year-end 2019, more volatility is expected and Federal Reserve intervention is all but assured.

The solutions to insufficient repo liquidity can be found at both private sector banks and the Federal Reserve itself. While many of these solutions are mostly understood, disagreements continue on who should provide liquidity, who sets the rules and who sets the rates. How these questions get answered will shape a generation’s view on how government and private actors are meant to function in capital markets. It’s a big question, and repo is a petri dish for finding a solution.

This report reviews the state of US repo markets at year-end 2019. It provides market sizing across multiple portions of US repo, lessons derived from the events of September 16-20, 2019, and an assessment of the fastest growing part of the market, FICC’s sponsored repo program. It concludes with a review of the options available to regulators and a look at how far free market practices can go in the current regulatory environment.

The end result should provide insight on important market structure drivers, and how philosophical differences on Federal Reserve intervention vs. private market engagement may progress in the next year.

Table of Contents

  • Executive Summary
  • US Repo at a Crossroads
    • – US Repo by the Numbers
    • – Methodology
  • Lessons from September 16-20, 2019
    • – The Fed and Bank Reserves
    • – Treasury Tax and Loan vs Treasury General Account
  • An Assessment of Sponsored Repo
    • – Sponsored Repo and Risk
  • Limits to US Treasury Issuance
  • Options for Policymakers
    • – Balance Sheet Deregulation
    • – Federal Reserve Options
  • How Far Can the Free Market Go?
  • About the Author
  • About Finadium LLC

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