In late April, we excerpted from the Financial Stability Oversight Council's (FSOC's) "2013 Annual Report," which contained a section on "Money Market Funds" (see our April 26 News "FSOC Report Comments on MMF Reform, Will Stand Down if SEC Moves"). Today, we reprint the report's sections on "Wholesale Funding Markets." FSOC writes, "Short-term wholesale funding markets provide financial intermediaries with funds that supplement retail deposits and long-term debt issuance. These funds include large time deposits, certificates of deposit, repurchase agreements (repos), and commercial paper. Sources of funds in these markets are largely wholesale cash pools, including cash on the balance sheets of nonfinancial companies, reinvestments of cash collateral from securities lending, and cash held by long-term mutual funds, money market mutual funds, pension funds, and sovereign wealth funds. These sources of funds have grown markedly as a percentage of GDP over the past two decades, although this percentage has been declining since early 2008 [note: references to charts have been removed in our excerpt, but see pages 64-67]. Cash on nonfinancial corporate balance sheets, in particular, has been growing at an accelerating rate, a pattern that continued through the fourth quarter of 2012."

It explains, "Domestic banking firms' reliance on short-term wholesale funding continued to decline in 2012, as retail deposits grew. The longer-term stability and cost of deposit inflows during this low interest rate period will be key to funding and interest rate risk projections in the future. Enhanced central bank provisions of liquidity, combined with a significant reduction of European banks' dollar funding needs as they deleverage their balance sheets, has contributed to a reduction in the premium for borrowing dollars via foreign exchange (FX) swap markets to the lowest level since early 2011. This overall normalization in the FX swap market and the improved access to dollar funding for European banks, was supported by the November 2011 decrease in the interest rate charged on central bank liquidity swaps and the ECB's two 3-year longer-term refinancing operations, along with other actions to strengthen the euro area's institutional and fiscal framework. The decision to include a levy on bank deposits in the Cyprus bailout terms was associated to a modest uptick in the premium for borrowing U.S. dollars against the euro in March 2013."

The report says of "Commercial Paper and Asset-Backed Commercial Paper," "Commercial paper (CP) outstanding peaked at $2.2 trillion in July 2007 and stood at $1.0 trillion in February 2013, primarily due to the continuing decline in asset-backed commercial paper (ABCP) outstanding. As of February 2013, ABCP accounts for 28 percent of all outstanding CP, financial CP accounts for 51 percent, and nonfinancial corporate CP accounts for 21 percent. Financial CP and certificates of deposit (CDs) outstanding are around 40 to 50 percent below their pre-crisis peaks. After contracting sharply in 2011, largely due to investor concerns about European debt, CP outstanding at financial institutions with European parents remained stable in the second half of 2012 and has increased notably in early 2013. Even so, financial CP outstanding with European parents remains well below the levels seen in early 2011."

It comments on "Repo Markets," "A repurchase agreement (repo) is the sale of securities for cash with an agreement to repurchase the securities at a specified date and price. This agreement effectively creates a secured loan with securities as collateral. Securities broker-dealers play a significant role in repo markets. There are three repo market segments: the tri-party market, in which broker-dealers obtain funding from cash investors and transact utilizing the collateral management and settlement services of the two tri-party repo clearing banks (JPMorgan Chase and Bank of New York Mellon); the General Collateral Finance (GCF) market, which primarily settles inter-dealer transactions on the tri-party repo platform; and bilateral repo, in which transactions are executed without the services of the two tri-party clearing banks."

FSOC writes, "Repo activity continued to increase in 2012, both as measured in the tri-party repo statistics and in the primary dealer survey. Market participants have noted that some firms have extended maturities for certain repo collateral, indicating an increased willingness of some participants to provide longer-term funding in this market. However, haircuts in the tri-party market on collateral that is not eligible for use in open market operations (OMO) have not declined, indicating an unchanged stance towards collateral quality and potential price volatility."

They add, "The majority of tri-party repo financing remains collateralized by Treasury securities, agency MBS, agency debentures, and agency collateralized mortgage obligations (CMOs). As of February 2013, these types of collateral accounted for 84 percent of all tri-party repo collateral. The other 16 percent of collateral used in tri-party repo includes corporate bonds, equities, private label CMOs, ABS, CP, other money market instruments, whole loans, and municipal bonds. As is true in the securities lending market, repo markets can be used to effect collateral transformation."

The Annual Report's section on "Securities Lending," says, "The largest component of securities lending this past year continued to be undertaken by long-term securities holders such as pension funds, mutual funds, and central banks. The global value of securities lending transactions remained fairly flat through March 2012, at an average value of around $1.7 trillion according to available estimates. Reinvestment of cash collateral from securities lending has declined slowly over the past year, from $659 billion in the fourth quarter of 2011 to $591 billion in the fourth quarter of 2012. The weighted average maturity (WAM) of cash reinvestment has also continued to decline, albeit not as markedly as in previous years. This decline represents a continued trend towards more conservative asset allocation since the financial crisis by cash collateral reinvestment pools."

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