Fitch Ratings released a study entitled, "Repos: A Deep Dive in the Collateral Pool" yesterday, which discusses structured finance repo and a number of other aspects of the repurchase agreement market. It says, "Repurchase agreements (repos), a core part of the "shadow banking" system, are increasingly in the spotlight, given both their importance as a funding mechanism and their role in past episodes of market distress. This study updates Fitch Ratings' earlier report, "Repo Emerges from the 'Shadow,'" dated Feb. 3, 2012, which highlighted the post financial crisis resurgence in the use of structured finance collateral within triparty repo markets."
The ratings agency writes, "As revealed through Fitch's analysis of the 10 largest U.S. prime money market funds' (MMFs) disclosures, structured finance repos are typically collateralized by pools of securities that are of lower credit quality (e.g. 'CCC' and below), deeply discounted, and small in size. Additionally, while Treasurys and agencies represent a significant majority of collateral, repos are also used to finance corporate debt, gold, and equity securities. Funding relatively less liquid, more volatile assets through repos (which are effectively short-term loans) creates potential liquidity risks for both repo borrowers and the underlying assets."
The paper explains, "Triparty markets are used to finance roughly $90 billion of structured finance securities, based on estimates from Federal Reserve Bank of New York (FRBNY) data (see table, Structured Finance Repo Collateral: A Drill-Down). As context, average daily trading volumes for non-agency residential mortgage-backed securities (RMBS) and asset-backed securities (ABS) combined is about $6 billion, according to SIFMA. Fitch's sample, which captures $21.2 billion or almost one quarter of the structured finance securities funded through triparty repo, reveals the potential liquidity risks inherent in much of this collateral. These liquidity risks stem from both the small size of many of these securities.... For example, roughly 50% of this sample consists of legacy CDOs and subprime and Alt-A RMBS, much of which was originated by financial institutions that experienced severe distress related to their securitization and mortgage-related exposures during the U.S. credit crisis."
Finally, Fitch adds, "Despite the extensive interest in repo markets, data is relatively scarce. This study helps to fill that gap by analyzing disclosures of the 10 largest U.S. prime money funds. MMF disclosures provide the most detailed publicly available historical information on repo haircuts, pricing, collateral, and counterparties. Based on these disclosures, Fitch has been able to construct a time series of repo attributes back to end-2006, capturing trends before, during, and after the U.S. credit crisis.... The recently developed SEC Form N-MFP is an unparalleled source of granular, security-level repo information, including issuers and valuations, enabling Fitch to take a more in-depth view of the collateral pool. This detailed analysis complements the aggregated, high-level data provided by the FRBNY, which offers a comprehensive summary of the triparty repo market as a whole."
In other news, Bloomberg writes "Money Funds Seen Failing in Crisis as SEC Bows to Shadow Lobby". The oddly-titled article says, "Money-market fund companies have doubled lobbying efforts to convince regulators and lawmakers that they aren't a threat to the financial system. The money may have been well-spent. The 10 biggest money-fund managers and the Investment Company Institute trade group reported combined lobbying spending of $16 million in the first half of 2012 and $31.6 million last year in disclosures that reference money-market mutual funds, according to a review of documents by Bloomberg News. That compares with $16.7 million in all of 2010."
It adds, "The companies are seeking to block new rules championed by Securities and Exchange Commission Chairman Mary Schapiro that are headed for a vote before a divided commission as soon as this month. The proposal would force funds to abandon their fixed $1 share price or introduce withdrawal limits and capital buffers. Schapiro can count on only one supporting vote from the other four commissioners, even as Federal Reserve officials have said that failure to enact tougher rules will leave the $2.5 trillion industry vulnerable to investor runs and threaten global credit markets."