Barclays' Abate on Repo-Cussions
Barclays' Joseph Abate writes "Regulatory Reform: Repo-cussions" in his latest update. The summary says, "[W]e take a closer look at how recent bank reforms have changed the size, scope, and nature of the $2.5trn repo market. We also explore how these challenges are likely to intensify in coming years. Repo volumes have shrunk in two waves since March 2008. The recent decline appears to be driven by several factors in addition to regulatory pressure. The effect of tougher bank regulation on the repo market extends beyond trading volumes. Capital requirements appear to have the most significant effect on repo volumes. Net stable funding requirements will amplify the effect. The liquidity coverage ratio seems to be influencing the mix of collateral pledged. As regulatory deadlines approach, we expect these mix and volume effects to intensify. Non-Fed tri-party repo may contract 20% in the next year or so. While further volume reduction and collateral shifts will likely produce market "winners" and "losers," they will also spur market changes and alter the way banks and dealers think about the business." It concludes, "Most people pay little attention to plumbing, provided it works properly. The repo market has long been considered a dull part of the financial market plumbing, largely overlooked by many until it stops working, as it did during the financial crisis. However, just as plumbing attracts considerable focus when the taps run dry (or otherwise), this mundane market is about to get significantly more attention. Regulatory reform is likely to shrink the market further and reduce the role of banks and dealers as intermediaries in the exchange of collateral and cash. Similarly, balance sheet scarcity is likely to lead to further spread widening with clear winners (banks) and losers (long-only investors who cannot net trades). At the same time, the Fed's efforts to put a floor under short-term interest rates is likely to increase the central bank's presence in the repo market despite its discomfort with the RRP program."
