Finadium report: The US Repo Market in 2014

The US repo market will reach a turning point in the next two years when it faces actual regulatory change. In a new research report, Finadium analyzes the current and future state of the US repo market through conversations with market participants, analysis of proposed regulations and a review of available US repo data.

As a well-tested mechanism for risk transfer and funding of positions, repo will survive – it is in fact extremely important for modern financial markets and too useful to lose. The challenge is making repo safer while maintaining its structure. The last thing regulators or market participants want are changes that make repo less flexible and less able to facilitate treasury and other US financial market trades. This is a difficult balance to maintain however.

While the Federal Reserve and the DTCC produce valuable data, we believe that two additional factors will soon affect data collection in the US markets. First, between the Office of Financial Research and the Federal Reserve, a trade repository will come into force. The Financial Stability Board has provided a reasonable roadmap for how regulators should collect data; we expect the US to follow this position. Second, dealers themselves may seek to provide more data to government regulators in order to forestall greater disruptions to their businesses or to disprove the idea that repo provides undue leverage to financial markets.

Given these biases, Finadium has developed a methodology for what data we believe would be useful to regulators and market participants. We would expect these data to be reserved in detail for regulators but published in aggregate for the market and other policy makers, similar to the Federal Reserveʼs current Senior Credit Officer Opinion Survey (SCOOS). The data could also be seen as a US corollary to the valuable ICMA/European Repo Council biannual survey of European repo dealers but with greater specificity on some aspects, for example breaking out overlapping repos and reverse repos on the books of reporting dealers.

While the greatest projected impacts to the US repo market are external, including the growth of the US and global economies and how fast the Federal Reserve moves away from Quantitative Easing, there are a range of more industry-specific matters that could affect the repo landscape. We present nine expectations and predictions of the major areas to watch over the next two years.

This report should be read by repo dealers, liquidity managers, cash investors, legal advisors, policy makers, fixed income investors and others with a vested interest in a safe, robust US repo market. Repo is highly intertwined with other financial market activities; this report seeks to identify areas where divergent interests can find common ground, especially in the collection and management of US data.

More details on the report can be found at the Finadium website.

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