The repo rate spiked in mid-September 2019, rising to as high as 10 percent intra-day and, even then, financial institutions with excess cash refused to … Kai Ryssdal and Maria Hollenhorst Oct 9, 2019. As risk premiums go, 8% is shockingly high—for a supposedly risk-free asset! 34 U.S. Department of Agriculture Agricultural Marketing ServiceLivestock, Poultry & Grain Market News USDA AMS Livestock, Poultry & Grain Market News 1 What started in the repo market last week isn’t new—it’s actually the fourth such episode since 2008. endstream endobj 88 0 obj <>stream It had already briefly blown out at the end of 2018, then settled back down. v � !�� R0���(T� V�dr1Х�̕F@�����c`�af�f�gt`�v��'�����#�i�>`8�U10_� �)w�)���Q � T�W� That trade lost someone a whopping 8% (annualized) overnight, but presumably the trade allowed the bank to stay in business for another day. It has no lender of last resort because it doesn’t need one. J�H?�5+����r��-��`�=���wX�ŀxܕX �H!4�*�'r���"}.�'׻��_�����^s"� ��� But the issues started bubbling up again. The repo market is huge. You can see how much liquidity that the Fed has injected in the repo markets in the official balance sheet. 0 Rather, I’m referring to the practice in the repo market that allows more people to believe they own US Treasuries than actually do. For years, IMF economist Dr. Manmohan Singh has done terrific work estimating it (see examples here, here, here, here, here, here and here). Why was someone willing to borrow cash at a 10% interest rate last Tuesday, in exchange for pledging US Treasury collateral that yields only 2% or less? Since January 2018 I've volunteered in my native state of Wyoming to enact a series of enabling blockchain laws, and am a gubernatorial appointee to the Wyoming Blockchain Task Force. h�T�Mo�0��� The financial system is fragile. It’s akin to musical chairs—no one knows how many players will be without a chair until the music stops. Bitcoin is no one’s IOU. ... on Wednesday, July 31, 2019. these hqla municipal obligations represent the collateral for the repo’s and are the same as cash for lcr stress/testing. counting of US Treasuries takes place. Multiple parties report that they own the very same asset, when only one of them truly does. What’s Wrong With the Repo Market? No one knows, but I doubt this is “the big one.” Sure, the repo market is flashing red sirens. Stepping back, it reveals two big things about financial markets: first, US Treasuries are not truly “risk-free” assets, as most consider them to be, and second, big banks are significantly undercapitalized. @����[�K�B����N��g�O��>�|�~���/�3�Y�@�] 7�(P�Bںz؇�vwHL�4B��~��Z� ��'�m�v�����Ïz�3t�5���5B���B���z^��zh�P��L3;ۍ��$�3$��_��pH�=�wo����\���? The repo market can be split into two main segments: Bilateral Repo – The bilateral repo market has investors and collateral providers directly exchange money and securities, absent a clearing bank. You may opt-out by. The September 16 Repo Market Fiasco. The repo market seized up last week, with median repurchase rates skyrocketing from their usual band of 2.00-2.25% to 2.46% on Monday, and 5.25% on … A Followup. 84 0 obj <> endobj Last week the financial system ran out of cash. … When that same bond is reused again and again and again in similar transactions, the magnitude of double counting within the financial system builds in a manner that no one can accurately measure. Every player knows there aren’t enough chairs. The closest I’ve heard a financial regulator speak publicly of this is former CFTC Chairman Chris Giancarlo, to his credit, when he answered a question after a 2016 speech: “At the heart of the financial crisis, perhaps the most critical element was the lack of visibility into the counterparty credit exposure of one major financial institution to another. Auditors can’t catch this because GAAP accounting standards obfuscate it, as I’ll explain later. The third was the huge tax cuts of 2017, much of which was spent on buybacks. Italy GC averaged -0.30, around 17bp cheaper than Oct. 24, 2019 9:30 am. ICMA, January 2020 The European repo market at 2019 year-end 7 | P a g e Periphery repo Periphery GC rates tend to cheapen over year-end, in particular Italy, and 2019 was no exception although the moves were relatively range bound. Most financial regulators baffle us with jargon when they discuss this issue, making it barely intelligible to regular folks (cloaking it in such terms as “clogged transmission mechanisms,” “length of collateral chains”). It made me uncomfortable when I first realized all of this, which for me happened during the financial crisis while I was working on Wall Street and took a deep dive into why the crisis was happening. The Federal Reserve is closing out 2019 seemingly in control, at least for the moment, of a problem that only a few months ago threatened to spiral into a crisis. That’s right. Party A owns a particular US Treasury Bond, showing an asset of $100. But US Treasuries are not risk-free. (By this, I’m not referring to the US potentially defaulting on its debt obligations. Banks are supposedly healthy and flush with cash, right? But, as usual, the Fed will almost certainly do what it always does—stem the run by injecting cash into the system in various ways, thereby socializing losses among all US dollar holders. No one really knows how solvent (insolvent?) What started in the repo market last week isn’t new—it’s actually the fourth such episode since 2008. This describes Bitcoin, whose network security grows as the system’s processing power grows. The Fed Repo-market turmoil raises almost existential question about post-crisis Wall Street rules, former Fed official says Published: Dec. 6, 2019 at 8:09 a.m. We advocate for effective and resilient capital markets. The repo market blew out in mid-September. 105 0 obj <>stream It’s as close as a regulator will come to admitting the reality that the system doesn’t work the way most of us think it does and that the Fed may not even understand critical things about it. Singh has been recommending for years that regulators’ financial stability assessments of big banks be adjusted to back out “pledged collateral, or the associated reuse of such assets.” Financial regulators should have followed his advice years ago! This is why the FT’s interview with Williams was so extraordinary. The repo rate rose just 0.08 percentage points above recent levels, suggesting that the Fed’s efforts to make the market more resilient had succeeded. In June 2014, FASB updated the US GAAP accounting rules for repos. I’m a 22-year Wall Street veteran who has been active in bitcoin since 2012, and whose passion is a fair and stable financial system. They recognize that what appears to be an 8% risk-free arbitrage is anything but risk-free. Here’s what the books of three parties show when a transferee (Party A) sells pledged collateral to a third party (Party C): If you add up the positions of all parties, economically there’s no problem because the net of the two longs and one short position add up to $100. Opinions expressed by Forbes Contributors are their own. The problem arises when you aggregate the three US GAAP financial statements. EGG MARKET NEWS REPORT ISSN 1520-6122 Monday, August 26, 2019 Vol. Shockingly, the Fed admitted to asking itself this same question, as revealed in an extraordinary interview on Friday with New York Fed President John Williams in the\Financial Times. The feared chaos in the repo market over the year-end period didn't materialize as the Fed had flooded the market with cash via repo operations and purchases of T-bills. US Repo Market Fact Sheet, 2019 US Repo Market Fact Sheet, 2018 US Repo Market Fact Sheet, 2017 US Repo Market Fact Sheet, 2016 US Repo Market Fact Sheet, 2015 About SIFMA. For every US Treasury security outstanding, roughly three parties believe they own it. Somebody—probably a big bank—needs cash so badly that it has been willing to pay a shockingly high cost to obtain it. In this regard, Bitcoin is an insurance policy against financial market instability. Bilateral repo transactions can either allow for general collateral or ... SIFMA 2019 US Repo Market Fact Sheet SIFMA Research ” profits and systemic volatility fourth such episode since 2008 “ teachable ”! An anti-fragile system is one that becomes stronger and more resilient as result. 17Bp cheaper than EGG market NEWS report ISSN 1520-6122 Monday, August 26, 2019 it will have knock-on... Oct 9, 2019 9:30 am doesn ’ t help here, and the accounting profession bears of! 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