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203 posts on "Financial Markets"

October 17, 2018

Credit Market Choice



LSE_2018_Credit Market Choice

Credit default swaps (CDS) are frequently credited with being the cause of AIG’s collapse during the financial crisis. A Reuters article from September 2008, for example, notes “[w]hen you hear that the collapse of AIG […] might lead to a systemic collapse of the global financial system, the feared culprit is, largely, that once-obscure […] instrument known as a credit default swap.” Yet, despite the prominent role that CDS played during the financial crisis, little is known about how individual financial institutions utilize CDS contracts on individual companies. In a recent New York Fed staff report, we assess the choice banks face when trading the idiosyncratic credit risk of a firm, and argue that banks’ participation decisions have been affected in the post-regulation period, either by direct changes in market structure or by changes in the relative cost of pursuing different strategies.

Continue reading "Credit Market Choice" »

October 16, 2018

Liquidity Effects of Post-Crisis Regulatory Reform



LSE_2018_Liquidity Effects of Post-Crisis Regulatory Reform

The post-crisis regulatory reform efforts to improve capital and liquidity positions of regulated institutions provide incentives for banks to change not only the structure of their own balance sheets but also how they interact with their customers and other market participants more generally. A 2015 PwC study on global financial market liquidity, for example, noted that “[a]s banks respond to the new regulatory environment, they have sought to make more efficient use of capital and liquidity resources, by reducing the markets they serve and streamlining their operations.” In this blog post, we provide an overview of three recent New York Fed staff reports that study the impact that post-crisis regulation has had on the willingness and ability of regulated firms to participate in U.S. over-the-counter (OTC) markets.

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October 04, 2018

Changing Risk-Return Profiles



LSE_Changing Risk-Return Profiles

Are stock returns predictable? This question is a perennially popular subject of debate. In this post, we highlight some results from our recent working paper, where we investigate the matter. Rather than focusing on a single object like the forecasted mean or median, we look at the entire distribution of stock returns and find that the realized volatility of stock returns, especially financial sector stock returns, has strong predictive content for the future distribution of stock returns. This is a robust feature of the data since all of our results are obtained with real-time analyses using stock return data since the 1920s. Motivated by this result, we then evaluate whether the banking system appears healthier today, and if recent regulatory reforms have helped.

Continue reading "Changing Risk-Return Profiles" »

September 28, 2018

Unlocking the Treasury Market through TRACE



LSE_2018_Unlocking the Treasury Market through TRACE

The U.S. Treasury market is widely regarded as the deepest and most liquid securities market in the world, playing a critical role in the global economy and in the Federal Reserve’s implementation of monetary policy. Despite the Treasury market’s importance, the official sector has historically had limited access to information on cash market transactions. This data gap was most acutely demonstrated in the investigation of the October 15, 2014, flash event in the Treasury market, as highlighted in the Joint Staff Report (JSR). Following the JSR, steps were taken to improve regulators’ access to information on Treasury market activity, as detailed in a previous Liberty Street Economics post, with Financial Industry Regulatory Authority (FINRA) members beginning to submit data on cash market transactions to FINRA’s Trade Reporting and Compliance Engine (TRACE) on July 10, 2017. This joint FEDS Note and Liberty Street Economics blog post from staff at the Board of Governors of the Federal Reserve System and Federal Reserve Bank of New York aims to share initial insights on the transactions data reported to TRACE, focusing on trading volumes in the market.

Continue reading "Unlocking the Treasury Market through TRACE" »

Posted by Blog Author at 7:00 AM in Financial Markets | Permalink | Comments (0)

September 12, 2018

Do You Know How Your Treasury Trades Are Cleared and Settled?



LSE_2018_Do You Know How Your Treasury Trades Are Cleared and Settled?t

The Treasury Market Practices Group (TMPG) recently released a consultative white paper on clearing and settlement processes for secondary market trades of U.S. Treasury securities. The paper describes in detail the many ways Treasury trades are cleared and settled— information that may not be readily available to all market participants—and identifies potential risk and resiliency issues. The work is designed to facilitate discussion as to whether current practices have room for improvement. In this post, we summarize the current state of clearing and settlement for secondary market Treasury trades and highlight some of the risks described in the white paper.

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Posted by Blog Author at 7:00 AM in Dealers, Financial Institutions, Financial Markets | Permalink | Comments (0)

July 18, 2018

The Premium for Money-Like Assets



LSE_The Premium for Money-Like Assets

Several academic papers have documented investors’ willingness to pay a premium to hold money-like assets and focused on its implications for financial stability. In a New York Fed staff report, we estimate such premium using a quasi-natural experiment, the recent reform of the money market fund (MMF) industry by the Securities and Exchange Commission (SEC).

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Posted by Blog Author at 7:00 AM in Financial Intermediation, Financial Markets, Regulation | Permalink | Comments (1)

March 26, 2018

Dealer Trading and Positioning in Floating Rate Notes



LSE_Dealer Trading and Positioning in Floating Rate Notes

In January 2014, the U.S. Treasury Department made its first sale of floating rate notes (FRNs), securities whose coupon rates vary over time depending on the course of short-term rates. Now that a few years have passed, we have enough data to analyze dealer trading and positioning in FRNs. In this post, we assess the level of trading and positioning, concentration across issues, and auction cycle effects, comparing these properties to those of other types of Treasury securities.

Continue reading "Dealer Trading and Positioning in Floating Rate Notes" »

Posted by Blog Author at 7:00 AM in Financial Institutions, Financial Markets, Treasury | Permalink | Comments (2)

February 28, 2018

Dealer Participation in the TSLF Options Program



LSE_2018_options-two_fleming_460_art

Second of two parts

Our previous post described the workings of the Term Securities Lending Facility Options Program (TOP), which offered dealers options for obtaining short-term loans over month- and quarter-end dates during the global financial crisis of 2007-08. In this follow-up post, we examine dealer participation in the TOP, including the extent to which dealers bid for options, at what fees, and whether they exercised their options. We also provide evidence on how uncertainty in dealers’ funding positions was related to the demand for the liquidity options.

Continue reading "Dealer Participation in the TSLF Options Program" »

Posted by Blog Author at 7:00 AM in Financial Institutions, Financial Markets | Permalink | Comments (2)

February 26, 2018

Options of Last Resort



LSE_2018_options-of-last-resort_fleming_460_art

First of two parts
During the global financial crisis of 2007-08, collateral markets became illiquid, making it difficult for dealers to obtain short-term funding to finance their positions. As lender of last resort, the Federal Reserve responded with various programs to promote liquidity in these markets, including the Primary Dealer Credit Facility and the Term Securities Lending Facility (TSLF). In this post, we describe an additional and rarely discussed liquidity facility introduced by the Fed during the crisis: the TSLF Options Program (TOP). The TOP was unique among crisis-period liquidity facilities in its provision of options. A follow-up post will analyze dealer participation in the TOP.

Continue reading "Options of Last Resort" »

Posted by Blog Author at 7:00 AM in Financial Institutions, Financial Markets | Permalink | Comments (3)

February 09, 2018

Hey, Economist! What Do Cryptocurrencies Have to Do with Trust?



LSE_Hey, Economist!  What Do Cryptocurrencies Have to Do with Trust?


Bitcoin and other “cryptocurrencies” have been much in the news lately, in part because of their wild gyrations in value. Michael Lee and Antoine Martin, economists in the New York Fed’s Money and Payment Studies function, have been following cryptocurrencies and agreed to answer some questions about digital money.

Continue reading "Hey, Economist! What Do Cryptocurrencies Have to Do with Trust?" »

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Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.

The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Asani Sarkar, all economists in the Bank’s Research Group.

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