State Street reported its Q3 2024 Earnings last week, where they reported record cash levels and also commented on FICC repo. CEO Ron O'Hanley tells us, "We are also very pleased with the momentum at Global Advisors this quarter. Our cash, ETF and institutional businesses all had positive net flows, including record quarterly flows in cash and strong ETF flows. In aggregate, quarterly total net flows of $100 billion and quarter-end assets under management of $4.7 trillion both reached record levels in 3Q. Importantly, we expanded our market share in a number of key product areas and geographies. For example, we improved our institutional money market fund rank this quarter, while Spider also gained share in both U.S. low cost and commodities, as well as in the EMEA region."
CFO Eric Aboaf comments, "Third quarter NII increased 16% year-on-year to $723 million as higher investment security yields and higher loan growth more than offset continued deposit rotation. On a sequential basis, NII was 2% lower, primarily driven by continued deposit rotation, as well as by the impact of lower short-end rates stemming from Central Bank actions. This dynamic was partially offset by higher investment security yields, as well as additional lending and sponsored repo activity. The market dynamics for the sponsored repo product were constructive in the quarter."
He says, "Average investment portfolio balances increased both sequentially and year-on-year. We also opportunistically repositioned a small portion of the book late in the quarter, which has a payback of approximately five quarters, benefiting NII over the next two years. Average deposits increased 14% year-on-year and 2% quarter-on-quarter, as we continue to realize the benefits of our client engagement efforts. As we move into 4Q, we'd expect to generally operate around these levels, albeit with a bit of continued noninterest-bearing deposit rotation."
During the Q&A, Aboaf replies, "The repo product is one of many that we offer for clients, right? We offer them cash on deposit in various forms. Money market sweep repo is a collateralized activity. So, in a way, think of it as one of the broad range of elements that we offer. What we found is as the Fed has trended down its reversed repo operation, there's been more repo activity in the market and we've obviously wanted to be there to help our clients."
He continues, "That said, ... the sponsored repo activity that we do is 10%, 11%, 12% of our NII typically. It will bounce around by 1 or 2 percentage points. This quarter, I called it out because I think we added about 1 percentage point of NII due to the increase in repo activity. And what you're working through is sometimes balances are up a bit, sometimes margins are up a bit, and we just found more activity in the market. There's more cash out there as you've seen. And there are also more borrowers who are looking for cash and have collateral to post. And those are markets where we're happy to serve our clients on both sides of that transaction and stepped in and stepped up for them."
Aboaf adds, "We're operating through deposit levels, interest-bearing, noninterest-bearing, our portfolio composition, quarter by quarter by quarter. And so, we don't have additional information really to share regarding next year other than what we've said before, right? We've said that we continue for this past quarter and into the fourth quarter, expect some modest or slight amount of deposit rotation. That's a headwind. We've got the investment portfolio rolling through, but some quarters you get a bigger or smaller benefit just depending on the exact bond. And then, you've got lending activity. And then, you've got repo, as we talked about earlier on the call, bouncing up and down."
Aboaf states, "Deposits in the system have generally been trending up 1 point or 1.5 point a quarter. That's across the banking system. You've seen our results are a little more of that. And we didn't really see a lot of changes. We continue just to see a market environment where there's a fair amount of cash in the system. Part of that is positioning. Part of that is, I think, carefulness on our investors -- that our investors have given the political and economic uncertainty. And so, the cuts didn't have a discernible impact on deposit levels. And in general, we think we're going to operate in and or around this level for the time being."
In related news, J.P. Morgan's latest "Short-Term Market Outlook & Strategy" writes, "The latest MMF holdings data revealed a surge in repo usage (ex-RRP) by MMFs at quarter-end. For a statement date, this is somewhat atypical as repo balances tend to decline at quarter-ends due to dealer balance sheet constraints. However, at the end of September, the majority of repos transacted by MMFs were conducted via FICC-sponsored repo ($149bn), marking the highest monthly increase in usage over the past five years."
They say, "This substantial rise aligns with the growing use of FICC-sponsored repo among dealers to help alleviate balance sheet constraints. In fact, FICC-sponsored repo usage by MMFs rose from 13% in September 2023 to 29% in September 2024 of total repo (ex-RRP) exposure by counterparty type.... Simultaneously, MMFs' repo exposure to dealers, mainly in the UK and France, decreased by $36bn month-over-month at the end of September."
JPM continues, "Given the increase in non-Fed repo allocations among MMFs at quarter-end, the ON RRP facility only saw a modest increase of about $40bn MoM. Although government funds still make up the majority of the ON RRP facility's balance, their usage has been steadily declining, now comprising just under 65%.... Meanwhile, prime funds experienced a slight uptick, reaching just under 30% of usage. In terms of concentration, the top 10 individual funds continue to dominate the facility, accounting for 57% of total usage."
They explain, "More broadly, taxable MMFs experienced another strong month of inflows, with total balances rising by $231bn MoM, driven predominately by government MMFs. Despite the uptick in government MMF AUMs, supply was sufficient to meet demand: Treasury exposure increased by $114bn MoM, with the majority of the uptick in T-bills at $76bn, followed by Treasury coupons at $20bn, and Treasury FRNs at $18bn; repo exposure also increased by $100bn MoM.... Importantly, ON RRP balances were flat MoM. Meanwhile, Agency exposure declined by about $20bn. Regarding T-bills allocation, government MMFs significantly increased their holdings of bills maturing in less than 31 days by $221bn, but also allocated an additional $70bn to T-bills maturing in over 90 days."
Finally, they add, "Prime funds, on the other hand, experienced a stable month in terms of AUM growth. Despite this, they reduced credit exposure and increased repo allocations.... Most of the month-over-month reduction in credit exposure was in the form of time deposits, which is expected as banks often trim balance sheets for regulatory purposes at quarter-end. Overall, as we enter the last quarter of the year, MMF balances are likely to keep rising, fueled by seasonal inflows and an inverted money market yield curve. With an anticipated bill supply increase in October and November (our Treasury strategists expect it to rise by approximately $270bn), MMFs are expected to absorb some of this supply, potentially drawing cash from the RRP facility."
