Centrally Cleared Repo Market Brief - State Street Corporation
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Quarterly Update Q1 Update: March 12, 2020 Centrally Cleared Repo Market Brief 2019: A Banner Year for Sponsored Repo. What’s Next? 2019 was a break-out year for the Fixed Income Clearing Corporation’s Sponsoring/Sponsored Member Repurchase Agreement Program (“FICC Sponsored Repo”), with program differentiators (e.g., counterparty credit mitigation, operational ease for certain clients) colliding with market forces to drive very strong demand. Total FICC sponsored volume peaked at $524B at year-end 2019 (Figure 1). Although supply of month, quarter, or year-end cash investment and financing is a clear advantage to sponsored repo, average monthly volumes have steadily increased since November; January’s figure totaled $414.3B. This is in part a reflection of newly sponsored members entering FICC’s program, but it also may indicate that sponsored repo is factoring more prominently into sponsored firms’ cash investment and financing regimes on a day-to-day basis. US money market fund demand has been especially notable and remarked upon, in part due to publicly available reports showing balances with FICC. Money market funds saw roughly $665B of cash inflows over the course of 2019 (Figure 2); the bulk of this cash – just shy of $400B – flowed into government money market funds, for which FICC repo was a natural fit. While flows in 2020 are unlikely to match those of 2019, we expect money market fund investment to remain healthy. At least for the immediate future, these funds serve as a risk-off play for investors amidst the macroeconomic turbulence caused by the COVID-19 outbreak. A less-often discussed segment of sponsored demand – both for cash investment and borrowing – is driven by non-US funds, including UCITS and alternative funds. This segment experienced explosive growth in the second half of 2019, with associated sponsored volumes
nearly doubling from $119B to $212B between July The Federal Reserve’s Toolkit:
and January (Figure 3). Looking forward, non-US A Benign Start to 2020
funds, and non-money funds generally, will continue A combination of open market operations and US
to be an area of focus for sponsors. Targets for Treasury Bill purchases by the Federal Reserve
sponsors include derivative clearing organizations, (the “Fed”) beginning in September have added
corporations, insurance companies, federal ample liquidity to the market. During mid-January
home loan banks, and sovereign wealth funds. the General Collateral (“GC”) rate curve was
nearly perfectly flat for all of 2020, with no cuts
Fig 1: FICC Sponsored Volumes ($B) priced in. FICC overnight sponsored volumes
550 remained elevated post-year end ramp (Figure
500 1: note January monthly average) absent strong
450 conviction about the value of term (Figure 4).
400
The market readily digested the Fed’s tapering of
350
market support and hike to the Interest on Excess
300
7/19 8/19 9/19 10/19 11/19 12/19 1/20 Reserves (“IOER”) rate by 5bp to 1.60% announced
Daily Avg Peak on January 29th. This “technical” adjustment, which
Source: FICC was a reversal of the 5bp cut administered after the
repo crunch in September 2019, was widely expected
and elevated GC repo rates on a 1:1 basis thereafter.
Fig 2: Inflows to US Government Money Funds
GC rates settled in, maintaining a steady 2-3bp SOFR
Market Funds ($B)
IOER spread. Minutes from the January 29th Federal
2,900
Open Market Committee meeting indicated that US
2,750 Treasury Bill purchases, viewed as a permanent
rather than temporary increase to reserves, would
2,600 continue at $60B/month through April. The April
2,450
2,300
1/19 3/19 5/19 7/19 9/19 11/19 1/20
Fig 4: Money Fund Investments in
Source: Office of Financial Research US Treasuries ($B)
1350
1000
Fig 3: Monthly Peak Sponsored Volumes 900 1300
by Segment ($B)
800
350 1250
700
300
600 1200
250
200 500
1150
150 400
100 1000
300
7/19 8/19 9/19 10/19 11/19 12/19 1/20 6/19 7/19 8/19 9/19 10/19 11/19 12/19 1/20
US MMF Balances Other Sponsored Balances O/N Repo (lhs) Term Repo (lhs) UST Outright (rhs)
Source: FICC, Crane Data Source: Crane Data
2timeframe is significant in that the Fed will seek to Into A New Paradigm
support excess reserve balances, which exceed the Unlike the September 2019 funding market crunch
Fed’s “safety floor” of $1.5-1.6T (up from $1.25T in that was very much idiosyncratic to the repo market,
September 2019), throughout volatility expected in the the outbreak of COVID-19 is a macroeconomic threat
Treasury General Account as a result of tax season. that has sent shockwaves through financial markets
Market participants have speculated for ages that globally. As investors moved out of riskier assets and
the Fed may establish a standing repo facility. into typical safe havens, US Treasury yields across
However, design challenges include 1) to whom the curve repeatedly plummeted along the entire
to offer the facility (including possibly extending curve. Fed Chairman Jerome Powell announced
the facility to non-primary dealers), 2) the rate an emergency 50bps rate cut effective March 4th
at which the facility would be offered (too low (bringing the target range to 1.00-1.25%) that was
a rate could meaningfully disintermediate the intended to boost waning public confidence, prevent
market), and 3) the time of the day it would be stock market conditions from worsening, and,
offered. Notwithstanding the wide ranging market generally, support the US economy. Jitters in the
impacts of the COVID-19 outbreak (see below), US repo market were already high after two days of
the structural support provided to the Treasury relatively heavy Treasury settlement (~$50B), and
collateral repo market has dampened speculation of news of the cut quickly created an unsettled market.
any near-term advancement of a standing facility.
As the COVID-19 crisis continues to evolve, we
Ultimately, regardless of the mechanism it expect to see cash migrate out of risk assets,
decides to use, the Fed’s fall 2019-initiated actions e.g., equities, and into Treasury investments. Not
demonstrated its willingness and ability to limit surprisingly, government money market flows
dislocations in overnight funding. Moving forward, have been heavy, with material portions of this
we expect there will be less period-end volatility investible cash being placed in both sponsored and
and fewer idiosyncratic dislocation opportunities tri-party repo markets. At least in the short term,
to pick up extra yield (as evidenced in 4Q19). at the time of writing, overnight repo remains a
Fig 5: Federal Reserve Repo Market Intervention ($B)
500
375
250
125
0 9/2/2019 10/2/2019 11/2/2019 12/2/2019 1/2/2020
O/N OMO Term OMO Bill Purchases
Source: Federal Reserve Bank of New York
3more attractive investment option than outright Exchange Commission approved FICC’s term offering
Treasury purchases along the entire curve. on February 21, 2020. Indicative demand from
With a 50bp rate cut priced into term markets cash borrowers is healthy, with some borrowers
(including the Fed’s 3/10/20 term open market identifying a preference to roll term financing for
operation), money funds will be disincentivized a portion of their book and others noting a more
from seeking such repo. At least in the short opportunistic approach; cash investor appetite is still
term, money funds with higher Weighted Average being assessed and will be influenced by regulatory
Maturities represent an opportunity for investors liquidity requirements. To the extent market
to seek yield while residual positions still exist. conditions permit, term trades may offer sponsored
firms an opportunity to reduce wire or prime broker
Despite the disruption caused by COVID-19 the repo costs associated with rolling overnight trades. Timing
market has absorbed additional cash and financing of the market’s uptake of term sponsored repo will
needs predictably, a reassuring sign that the market be dependent upon new documentation requirements
is structurally sound. Moreover, the dearth of and will be shaped by the ease with which sponsored
Fed RRP balances show that money funds are not members may integrate such trades into their
presently worried about lending to the dealer, bank, operating processes. In any case, sponsoring firms
and sponsored community. As a sign of continued will seek to engineer creative solutions to match
support, the Fed has temporarily increased both trades, a requirement for balance sheet netting,
overnight and term open market operations to $150B with both direct and sponsored members.
and $45B, respectively. Primary dealer participation
remains strong, although this is likely a function With respect to FICC’s admission of new sponsoring
of price levels and appetite for stability amidst members, cash investors and cash borrowers appear
broader market conditions rather than financing quite keen to diversify their financing and investment
stress. It is unlikely that any increases push out the capacity. Our trading desk is seeing somewhat tighter
April wind down communicated subsequent to the pricing and the diversion of at least a portion of
January Federal Open Market Committee meeting. investable cash to the highest offer each morning.
How Will Broadened Sponsorship
Affect the Sponsored Repo Market?
We expect 2020 to be another year of growth for
the sponsored repo market. Whereas 2019 saw
significant sponsored volume increases largely
concentrated among sponsored members of
State Street, JP Morgan, and Bank of New York,
2020 sponsored trading activity will be supported
by multiple additional dealers and may receive a
boost from FICC’s anticipated new term offering,
which is intended to provide sponsored members
with more financing and investment options to
more flexibly manage their needs during periods
of expected volatility or dislocation. The Securities
4For information on State Street’s Sponsored Member Repo Program, contact:
FundingandCollateralSolutions@statestreet.com or visit our Funding & Collateral Solutions page
State Street Corporation
1 Lincoln Street, Boston, MA 02111
statestreet.com
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