Finance

1. 11/18/2015 Repo markets on the wane ­ The Banker
http://www.thebanker.com/World/Repo­markets­on­the­wane 1/2
Home / World / Repo markets on the wane
Print Email Share Comment
Repo markets on the wane
By Matthew Karwacki | Published: 12 November, 2015 | Comment on this article
With mounting regulation and the collateral drying up, activity in the repo market, the main avenue for short­term financing on Wall Street, is continuing
its free­fall.
Repo market volumes have reached a new low, continuing their steady decline since the 2008 global financial crisis. According to data from the US Federal Reserve (the
Fed), the outstanding notional of repo and reverse repo transactions is now below $4000bn, the lowest level since 2002 (see charts one and two).
Repos saw most active use in the run­up to the financial crisis, as banks used the market to increase their leverage. Volume then halved in a matter of months as
investors fled to quality and became reluctant to lend out securities. After the initial panic, activity in the market recovered to about $5000bn in 2010 and has been on a
downward trajectory since.
This decline is, in part, due to regulation. One of the main post­crisis supervisory initiatives was to steer banks away from short­term funding. One way this was done
was by requiring banks to hold higher capital against their repo transactions, eating into the narrow margins offered by the product.
A new 5% leverage ratio also added to the strain.
Collateral scarcity has also contributed to the weakness of the market. About 90% of repo transactions are completed against a government security of some sort and
since the crisis these have been in high demand (see chart three).
Under the stimulus, the Fed vacuumed up unprecedented amount of US treasuries along with mortgage­backed securities, squeezing the supply of main collateral on
the market. Investors also moved into government debt as a safe­haven asset.
It seems that the downward trend in repo is still far from bottoming out. By 2017, the banks will have to be fully compliant with liquidity coverage ratio (LCR), which will

2. 11/18/2015 Repo markets on the wane ­ The Banker
http://www.thebanker.com/World/Repo­markets­on­the­wane 2/2
Print Email Share Comment
give them one more reason to hoard government debt.
Under LCR banks will be required to hold a sufficient amount of high­grade securities (and Treasuries fit
the bill perfectly) to provide funding for the bank for 30 days. This will be followed by the net stable
funding ratio in 2018, under which maturities of liabilities and assets of banks will have to be more
closely aligned, effectively penalising repo funding.
A related issue is the increasing frequency of 'fails' – instances when the party in the repo agreement is
unable to deliver the required security. In the past, they have been associated with bouts of panic in the
markets when investors would fly to quality – in 2008 failures to deliver Treasuries peaked at 2.7 trillion –
and for that reason were relatively rare.
This picture has changed since then. In late­2014, a series of small scale repeated failures, each no
larger than $200bn, roiled the market (see chart four). Their frequency and small size looks like routine
rather than panic, which could be a sign that more banks are simply choosing not to participate in repo
markets.
More stories from this section
Foreign banks in Russia hold up in the recession Comment on this article
Sovereign debt weighs on Sweden’s banks Comment on this article
UK banks prepare for ringfence rule Comment on this article
Latin American IFCs witness big FDI fall Comment on this article
Latin American wealth management moves back offshore Comment on this article
Top 200 Latin American banks ranking 2015: Argentina and Brazil press on in hard times Comment on this article
© 2015 The Banker | A service from the Financial Times Ltd.