The Federal Reserve Bank of New York's Liberty Street Economics addresses the question, "Are New Repo Participants Gaining Ground?" It tells us, "Following the 2007-09 financial crisis, regulations were introduced that increased the cost of entering into repurchase agreements (repo) for bank holding companies (BHC). As a consequence, banks and securities dealers associated with BHCs, a set of firms which dominates the repo market, were predicted to pull back from the market. In this blog post, we examine whether this changed environment allowed new participants, particularly those not subject to the new regulations, to emerge. We find that although new participants have come on the scene and made gains, they remain a small part of the overall repo market."
The NY Fed blog explains, "A repo is the sale of an asset, coupled with the promise to repurchase the asset at a future date at specified terms. Repo is a crucial financial market in the United States because it is a key source of short-term funding for securities dealers and facilitates secondary market liquidity in Treasuries and other securities."
It tells us, "The adoption of Basel III rules required banks to maintain a thirty-day liquidity coverage ratio and to hold additional capital to meet the requirements of the supplementary leverage ratio. At the time, repo desks spoke of actions to adjust their repo activity in order to reduce the costs associated with the new regulations."
On the new participants in the repo market, the piece comments, "In order to evaluate the market share of new participants, we first need to understand how their chosen trading strategies allow us to capture a significant portion of their activity in the data available to us. The typical trading strategy of these new participants is to act as a middle man in a matched-book trade."
It adds, "For the majority of cases, executing a repo matched-book strategy involves entering into a repo in an interdealer market.... (Cash-rich investors such as money market mutual funds, for example, tend to be wary of investing in smaller dealers, even on a secured basis.)"
The Liberty Street Economics update states, "To measure new repo dealers' activity we look at the two main interdealer repo markets in the United States, the General Collateral Finance Repo Service (GCF Repo) and the Fixed Income Clearing Corporation's Delivery vs. Payment Service (FICC DvP). In both markets, dealers can only execute trades if they are a member of FICC, a financial utility which acts as a central counterparty.... Strikingly, the total of new members' reverse repo and repo activity has more than doubled since the start of 2018."
Finally, it concludes, "Even with the recent explosion in their repo activity, these new participants remain a small part of the overall market. In GCF Repo, these participants make up about 6 percent of total gross activity in the last quarter of 2018. Similarly, in FICC DvP, new repo participants are 3 percent of total gross activity for the same time period. As a point of reference, the average amount of GCF Repo and FICC DvP activity for a top-ten dealer is larger than the sum of the repo activity for all new participants. The prediction of a tectonic shift in the repo market with new repo participants' gaining market share seems not to have materialized."
In other news, S&P Global Ratings published an update entitled, "Inside Global ABCP: Moderate Growth Expected For The U.S. And EMEA Despite Market Uncertainties." It says, "As U.S. sponsors expand their current asset portfolios and prime institutional money-market funds return to the ABCP market, we expect U.S. ABCP outstanding to grow moderately to between $255 billion-$260 billion in 2019. In EMEA, we expect issuance volumes to likely gain momentum once there is greater clarity on Brexit and regulations related to securitization."
S&P's Dev Vithani and Ildiko Szilank write, "Although traditional assets account for most of the funding commitments in the U.S., we expect recent shifts in investor preferences into nontraditional assets such as servicer advances, contract payment rights, marketplace loans, and wireless handset devices to continue. Generally, the credit quality of collateral backing ABCP has been stable and has performed in tandem with collateral backing term asset-backed securities (ABS). Macroeconomic factors, such as GDP growth, low unemployment rates, and consumer loan growth, have similarly affected both markets."
The piece adds, "In EMEA and Japan, funding commitments remain predominantly concentrated in traditional assets with low maturity mismatch, such as autos and trade receivables. While the U.K., Italy, Germany, and France account for over 60% of total asset portfolios in EMEA, we have observed some renewed interest from investors to fund assets domiciled in Asia. Globally, the top 10 sponsors accounted for almost three-fourths of all S&P Global Ratings-rated ABCP outstanding as of December 2018."
S&P shows a table of the "Global Top 10 Sponsors Based On ABCP Outstanding As Of December 2018," which includes: JPMorgan Chase Bank N.A. ($42.7 billion, including Chariot Funding, Collateralized Commercial Paper II Co. and Jupiter Securitization Co.), Guggenheim Treasury Services ($30.9B including Crown Point Capital Co., Ridgefield Funding Co. and Bennington Stark Capital Co.), Credit Agricole Corporate and Investment Bank ($30.6B, including Atlantic Asset Securitization, La Fayette Asset Securitization and LMA), Royal Bank of Canada ($30.6B, including Bedford Row Funding Corp, Old Line Funding and Thunder Bay Funding), Citibank ($18.8B, including CRC Funding, CAFCO and Charta), Societe Generale ($16.7B, including Barton Capital and Antalis), Bank of Tokyo - MUFJ Bank Ltd. ($16.4B, including Gotham Funding Corp., Victory Receivables Corp. and Albion Capital Corporation), BNP Paribas ($14.8B, including Starbird Funding and Matchpoint Finance), FMS Wertmanagement Anstalt des oeffentlichen Rechts ($10.9B, Kells Funding), and BSN Holdings/BSN Capital Partners ($10.9B, including Chesham Finance. The Top 10 Global Programs Total $223.4 billion, or 72.6% of all ABCP.
