New money market fund rules have coaxed foreign banks to boost their presence in a crucial US funding market, helping to alleviate tension that can arise as institutions clean up their balance sheets at the end of the financial quarter.
The US tri-party repo market, where banks borrow cash from investors in exchange for collateral such as US Treasuries, has increased in size from $1.2tn in April 2016 to $1.5tn last month, according to data from the New York Fed. The growth comes after more stringent rules introduced in 2016 on so-called prime money market funds have encouraged investors to re-allocate money into safer, government money market funds, with non-US banks operating under a looser capital rule known as the leverage ratio meeting the demand, said Alex Roever, an analyst at JPMorgan.
Japanese, French and Canadian banks have led the charge, with BNP Paribas, Nomura, Crédit Agricole and RBC top of the list, according to Crane Data. Nomura has had the most dramatic increase in trading with money market funds, elevating its outstanding trades from $14.8bn at the end of July 2016 to $50.5bn at the end of July 2017.
Quarter-end squeezes are also dependent on supply and demand characteristics for repo collateral, but the larger role of foreign banks in the market is helping ease the usual scramble for Treasury paper, particularly from money market funds, which mark the end of a financial quarter.