NY Fed on GCF Repo Market
The New York Federal Reserve published an article on its Liberty Street Economics blog, "Have Dealers' Strategies in the GCF Repo Market Changed? where researchers examine changes in the General Collateral Finance repo market. It says, "In a previous post, "Mapping and Sizing the U.S. Repo Market," our colleagues described the structure of the U.S. repurchase agreement (repo) market. In this post, we consider whether recent regulatory changes have changed the behavior of securities broker-dealers, who play a significant role in repo markets. We focus on the General Collateral Finance (GCF) Repo market, an interdealer market primarily using U.S. Treasury and agency securities as collateral. We find that some dealers use GCF Repo as a substantial source of funding for their inventories, while others primarily use GCF Repo to fine-tune their repo positions. Recent regulatory changes, such as the supplementary leverage ratio (SLR), may be contributing to reduced lending in the GCF Repo market." It concludes, "Recent regulatory changes make repo trading more expensive," "In addition to regular Basel III risk-based capital requirements, the SLR requires BHCs with more than $700 billion in assets or $10 trillion in managed assets in the United States to hold additional capital against all assets on their balance sheets. These rules increase the total cost of maintaining a large balance sheet for broker-dealers affiliated with BHCs. In order to meet the new capital requirements some BHC-affiliated dealers might choose to reduce their repo activity. While these regulatory changes do not seem to have changed dealers' GCF Repo strategies, they do seem to have reduced the amount of activity that dealers are willing to participate in. Similarly, the introduction of the Federal Reserve's overnight reverse repo facility in 2014 may also have had a negative effect on the volume of GCF Repo activity, as it provided an alternative to dealers lending cash."
