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 an analysis of the options available to regulators and how far free market practices can go in the current regulatory environment.
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 should be read by US repo market participants at dealers and cash investors looking for insight on important market structure drivers, and into how philosophical differences on Federal Reserve intervention vs. private market engagement may progress in the next year. It has been written for a professional audience that engages in these markets on a regular basis. Related financial market participants, for example OTC derivatives traders that must organize a strategy for adopting 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.
A direct link to the report for Finadium research clients is https://finadium.com/finadium-report-desc/us-repo-year-end-2019-hard-choices-ahead/
For non-subscribers, more information is available here.