A new report from Finadium investigates why the historical repo/LIBOR relationship has reversed, what it means, and who can really get what rate in the open market.
Repo and LIBOR have reversed their historical pricing relationship: repo, an observed secured short-term trade, is now more expensive than LIBOR, a theoretically priced unsecured loan transaction. The retail analogy is if credit card debt was less expensive than a home mortgage for the same borrower. This is an awkward situation that should not exist but does, and is the result of historical practice, regulatory cost pressures and the difficulty of reforming LIBOR.
The repo/LIBOR flip has implications for financial markets as well including a need to understand what rates are really available and to whom. Counterparties and credit matter, but what happens when an advertised rate is not available at all?
This report has been written for all financial market participants with interests in the secured (repo) and unsecured (LIBOR) markets. This includes interest rate derivatives investors and dealing desks, repo investors, securities lending cash collateral investors and government regulators considering how to repair LIBOR.
This report is part of the Finadium Executive Briefing series, providing briefings and analysis to the financial markets industry.
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For non-subscribers, more information on this report and subscription information is available on the Finadium reports home page.