The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
Adam Copeland, R. Jay Kahn, Antoine Martin, Matthew McCormick, William Riordan, Kevin Clark, and Tim Wessel
The Treasury repo market is at the center of the U.S. financial system, serving as a source of secured funding as well as providing liquidity for Treasuries in the secondary market. Recently, results published by the Bank for International Settlements (BIS) raised concerns that the repo market may be dominated by as few as four banks. In this post, we show that the secured funding portion of the repo market is competitive by demonstrating that trading is not concentrated overall and explaining how the pricing of inter-dealer repo trades is available to a wide range of market participants. By extension, rate-indexes based on repo trades, such as SOFR, reflect a deep market with a broad set of participants.
As the aggregate supply of reserves shrinks and large banks implement liquidity regulations, they may follow a variety of liquidity management strategies depending on their business models and the interest rate differences between alternative liquid instruments. For example, the banks may continue to hold large amounts of excess reserves or shift to Treasury or agency securities or shrink their balance sheets. In this post, we provide new evidence on how large banks have managed their cash, which is the largest component of reserves, on a daily basis since the implementation of liquidity regulations.
Gara Afonso, Fabiola Ravazzolo, and Alessandro Zori
How do changes in the rate that the Federal Reserve pays on reserves held by depository institutions affect rates in money markets in which the Fed does not participate? Through which channels do changes in the so-called administered rates reach rates in onshore and offshore U.S. dollar money markets? In this post, we answer these questions with the help of an interactive map that guides us through the web of interconnected relationships between the Fed, key market players, and the various instruments in the U.S. dollar funding market, highlighting the linkages across the short-term financial products that form this market.
Following the 2007-09 financial crisis, regulations were introduced that increased the cost of entering into repurchase agreements (repo) for bank holding companies (BHC). As a consequence, banks and securities dealers associated with BHCs, a set of firms which dominates the repo market, were predicted to pull back from the market. In this blog post, we examine whether this changed environment allowed new participants, particularly those not subject to the new regulations, to emerge. We find that although new participants have come on the scene and made gains, they remain a small part of the overall repo market.
Antoine Martin, Susan McLaughlin, and Jordan Pollinger
The Federal Reserve Bank of New York releases data on a number of market operations, reference rates, monetary policy expectations, and Federal Reserve securities portfolio holdings. These data are released at different times, for different types of securities or rates, and for different audiences. In an effort to bring this information together in a single, convenient location, the New York Fed developed the Markets Data Dashboard, which was launched today.
Editor's note: In the original version of this blog post, a computational error was reflected in the chart “Distribution of Premiums Paid on ‘Excess Capacity’ Repos” and related text. Both have been corrected. (October 23, 2017, 12:37 p.m.)
In a previous post, we showed that dealers sometimes enter into tri-party repo contracts to acquire excess funding capacity, and that this strategy is most prevalent for the agency mortgage-backed securities (MBS) and equity asset classes. In this post, we examine the maturity of the repos used to pursue this strategy and estimate the associated costs. We find that repos that generate excess funding capacity for equities and corporate debt have longer maturities than the average repo involving either of these asset classes. Furthermore, the premiums dealers pay to maintain excess funding capacity can be substantial, particularly for equities.
Security dealers sometimes enter into tri-party repo contracts to fund one class of securities with the expectation they will wind up settling the contract with higher quality securities. This strategy is costly to dealers because they could have borrowed funds at lower rates had they agreed to use the higher-quality securities at the outset. So why do dealers do this? Why obtain or arrange excess funding for the initial asset class? In this post, we discuss possible rationales for an excess funding strategy and measure the extent of excess funding capacity in the tri-party repo market. In a second post, we examine the maturities of repos used to generate excess funding capacity and estimate the costs of this strategy.
James Egelhof, Antoine Martin, and Noah Zinsmeister
Since the global financial crisis, central bankers and other prudential authorities have been working to design and implement new banking regulations, known as Basel III, to reduce risk in the financial sector. Although most features of the Basel III regime are implemented consistently across jurisdictions, some important details vary. In particular, banks headquartered in the euro area, Switzerland, and Japan report their leverage ratios—essentially, capital divided by total consolidated assets—as a snapshot of their value on the last day of the quarter. In contrast, institutions headquartered in the United States and the United Kingdom report most leverage ratio components as averages of their daily values over the quarter. In this post, we study the impact of this difference in regulatory implementation on rates and quantities borrowed in the U.S. repo market.
Viral V. Acharya, Michael J. Fleming, Warren B. Hrung, and Asani Sarkar
During the 2007-08 financial crisis, the Fed established lending facilities designed to improve market functioning by providing liquidity to nondepository financial institutions—the first lending targeted to this group since the 1930s. What was the financial condition of the dealers that borrowed from these facilities? Were they healthy institutions behaving opportunistically or were they genuinely distressed? In published research, we find that dealers in a weaker financial condition were more likely to participate than healthier ones and tended to borrow more. Our findings reinforce the importance of Bagehot’s principle that the lender-of-last resort should lend only against high-quality collateral and at a penalty rate so as to discourage unneeded or opportunistic borrowing.
Alexandra Altman, Kathryn Bayeux, Marco Cipriani, Adam Copeland, Scott Sherman, Brett Solimine
Editor’s note: When this post was first published, the linked file with historical rates and volumes for the three Treasury repo rates had some minor errors. The data and related charts have been corrected. These changes did not alter the authors’ conclusions. (January 30, 2018, 4:00 p.m.)
Editor’s note: In the data file originally released with this post, some repo volume figures were misaligned with their dates; the problem has been corrected. (December 19, 2016, 11:15 a.m.)
In its recent “Statement Regarding the Publication of Overnight Treasury GC Repo Rates,” the Federal Reserve Bank of New York, in cooperation with the U.S. Treasury Department’s Office of Financial Research, announced the potential publication of three overnight Treasury general collateral (GC) repurchase (repo) benchmark rates. Each of the proposed rates is designed to capture a particular segment of repo market activity. All three rates, as currently envisioned, would initially be based on transaction-level overnight GC repo trades occurring on tri-party repo platforms. The first rate would only include transactions in the tri-party repo market, excluding both General Collateral Finance Repo Service, or GCF Repo®, transactions and Federal Reserve transactions. (GCF Repo is a registered service mark of the Fixed Income Clearing Corporation.) Henceforth in this post, this segment will be referred to as tri-party ex-GCF/Fed. The second rate would build on the first by including GCF Repo trading activity while still excluding Federal Reserve transactions. Finally, the third rate would include tri-party ex-GCF/Fed transactions, GCF Repo transactions, and Federal Reserve transactions. The repo benchmark rates would be calculated as volume-weighted medians, as is currently the case for the production of the effective federal funds rate (EFFR) and the overnight bank funding rate (OBFR), and would be accompanied by summary statistics. The three proposed rate compositions result from staff analysis on the various market segments and characteristic trading behavior, though the New York Fed expects to work with the Board of Governors of the Federal Reserve System to seek public comment on the composition and calculation methodology for these rates before adopting a final publication plan.
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.
Liberty Street Economics does not publish new posts during the blackout periods surrounding Federal Open Market Committee meetings.
The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
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