Fidelity Repurchase Agreement Primer
Fidelity Investments released a "primer" entitled, "Money Markets: Repurchase Agreements," whose "Key Takeaways" include: Repurchase agreements (repos) are used by money market funds as short-term investments; Variations of repos are characterized by different types of collateral, including Treasury, government agency, and nontraditional collateral; and, Fidelity's money market mutual funds enter into repos with only counterparties that Fidelity's research team determines to represent minimal credit risk." Fidelity's `Michael Morin writes, "Repurchase agreements, "repos," are contracts for the sale and future repurchase of a pool of securities. On the termination (repurchase) date, the seller repurchases the securities and pays interest for the use of the buyer's funds. Fidelity's money market mutual funds primarily use tri-party repos, which consist of a buyer, a seller, and a tri-party clearing bank.... A majority of the repos executed across the industry comprise overnight investments in which the securities are repurchased by the seller on the next business day. Fidelity's taxable money market funds use overnight repos to help satisfy the Rule 2a-7 requirement to hold a 10% minimum of total assets in one-day liquid assets. Fidelity's money market funds also enter into term repos <b:>`_." The piece explains, "In money market investing, Treasury repos, government repos, and nontraditional repos are distinguished by the type of collateral subject to the repo. Collateral for Treasury repos is limited to securities issued by the U.S. Treasury, whereas collateral for government repos includes Treasury securities as well as securities issued or guaranteed by government agencies, including, among others, Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Nontraditional repos involve a wider range of collateral, including, without limitation, investment-grade and non-investment-grade fixed income securities, equities, and money market securities." Finally, Morin comments, "In 2009, the Federal Reserve Bank of New York (FRBNY) requested that a group be formed to address weaknesses in the tri-party repo market that became apparent during the financial crisis. The Tri-Party Repo Infrastructure Reform Task Force (the Task Force) was organized to address concerns associated with the infrastructure supporting that market. The group included representatives from a diverse range of participants in the tri-party repo market. In May 2010, the Task Force issued a report with recommendations to modify tri-party repo settlement processes to reduce dependency on the intraday credit provided by triparty repo clearing banks (J.P. Morgan Chase and The Bank of New York Mellon).... A great deal of progress has been made in this area. The share of tri-party repo volume that is now financed with intra-day credit from a clearing bank has dropped markedly, from 100% as recently as 2012, to a level averaging 3% to 5% at the end of April 2016 (as compared with the Task Force's original target of no more than 10%). Clearing banks, dealers, and investors all made changes to their practices and processes, which helped to achieve this goal.... However, a remaining policy concern of the New York Fed, which was not addressed by the Task Force's roadmap for reform, is the risk of fire sales of collateral by a dealer that is losing access to repo financing (pre-default), or by creditors of a dealer once it has defaulted (post-default)." It adds, "Substantial progress has been observed to date with respect to pre-default fire sales, because of capital and liquidity regulations that have prompted dealers to extend the tenor of their financing for less liquid assets." Morin concludes, "Repurchase agreements offer money market investors a liquid and collateralized short-term investment."
