In the tri-party repo market, we find that dealers seek excess funding capacity, especially for agency MBS and equities securities. This fact suggests that dealers value the option of having funding available for such asset classes in the future.
Using confidential, daily data covering March 2017, we compute dealers’ excess funding capacity in tri-party repo, where US dealers obtain a large part of their secured funding (for background, see this blog post). Our data cover a variety of transactions types but we focus on those labeled as repos that are not between affiliated parties. This subsample accounts for around 65 percent of the total value of tri-party repo in aggregate and by asset class (see total value statistics here).
Our data reveal both the lowest-quality asset class from which securities can be used to fulfil the obligations of a repo and the asset class of the securities actually allocated at settlement. We define excess funding capacity to be the amount of a repo backed by higher-than-necessary quality collateral. As an example, suppose that a dealer enters into a $95 repo where equities are the lowest-quality securities permissible. If the dealers allocate $90 of equities and $5 of U.S. Treasuries to the trade, the dealer has generated excess funding of $5 ($95-$90) with this repo (ignoring the securities allocated to satisfy the haircut requirements.)
Data show that of roughly $17 billion in agency debt repos in our sample (principal amount), nearly $6 billion, or 36 percent, represents excess capacity. The two asset classes with the highest amount of excess capacity are agency mortgage-backed securities (MBS) and equities repos, with $76 billion and $13.1 billion, respectively.