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nikol


Total Posts: 909
Joined: Jun 2005
 
Posted: 2019-12-09 08:22
What has happened? Flocking to treasuries by thrusting own collateral and hence spoofing risk capital?

https://www.bloomberg.com/amp/news/articles/2019-12-08/repo-blowup-was-fueled-by-big-banks-and-hedge-funds-bis-says

rickyvic


Total Posts: 196
Joined: Jul 2013
 
Posted: 2019-12-09 13:30
Difficult to say what happened in september.
Liquidity in repos dries up at times, sometimes excess demand on one side. Some other times is the excess inventory from banks and so one side of supply is affected.
It is not uncommon that overnight (sofr is what bis has looked at) rates jump, if you look at the fx swaps you will see this even more common.
In fact fx swaps are more likely to create problems but there is now a fed desk that monitors dollar liquidity on fx swaps and provides it if there is a large strain, it happened after lehman collapsed.

"amicus Plato sed magis amica Veritas"

Rookie_Quant


Total Posts: 759
Joined: Jun 2004
 
Posted: 2019-12-12 21:56
Does anyone have resources or white papers that could help me understand this market better? This new 500b liquidity backstop seems......ominous.

"These metaphors and similes aint similar to them, not at all." -Eminem

nikol


Total Posts: 909
Joined: Jun 2005
 
Posted: 2019-12-12 22:12
http://www.eseclending.com/wp-content/themes/klasik-child/pdfs/eSecLending_Securities_Lending_Best_Practices.pdf

"ages" ago I used to read these two docs (they are at the basement of all literature on the subject):

https://www.iosco.org/library/pubdocs/pdf/IOSCOPD96.pdf

https://www.researchgate.net/publication/229650592_An_Introduction_to_Securities_Lending

Rookie_Quant


Total Posts: 759
Joined: Jun 2004
 
Posted: 2019-12-13 14:16
Cheers for these.

"These metaphors and similes aint similar to them, not at all." -Eminem

nikol


Total Posts: 909
Joined: Jun 2005
 
Posted: 2019-12-15 10:38
just a thought:

SBL rates are jumping wildly around dividend x-days (at least in the old days long ago)

What could be similar cause for the same behavior in repo rates (on bonds)? QE or proxy of QE or some movements around Treasuries?

jslade


Total Posts: 1200
Joined: Feb 2007
 
Posted: 2019-12-18 19:37
I assume BIS knows what's going on:

https://www.bis.org/publ/qtrpdf/r_qt1912v.htm

This quote struck me as potentially particularly relevant: "Shifts in repo borrowing and lending by non-bank participants may have also played a role in the repo rate spike. Market commentary suggests that, in preceding quarters, leveraged players (eg hedge funds) were increasing their demand for Treasury repos to fund arbitrage trades between cash bonds and derivatives."

Dunno if it's a new chuckwagon being exploited, or if it's someone unwinding. Either way it can't be good.

"Learning, n. The kind of ignorance distinguishing the studious."

chiral3
Founding Member

Total Posts: 5122
Joined: Mar 2004
 
Posted: 2019-12-19 02:25
It's liquidity of the plumbing with the issue of SOFR adoption in the back drop.

Nonius is Satoshi Nakamoto. 物の哀れ

rickyvic


Total Posts: 196
Joined: Jul 2013
 
Posted: 2019-12-19 15:12
I would like to reiterate that the repos are not so liquid as one might think. There were situations in the past when things were normal when ability to repo or reverse repo was coming and going at times, especially in europe but also on treasuries.
What happened in september is not something the bis can really monitor as they dont see the flows and even the sofr is part of the issue as mentioned.

Fx swaps and the interbank market if contaminated is to be monitored very closely, that is dangerous.
BIS knows about it, they learnt it after Lehman and the dollar borrowing issue, but more interestingly central banks knows this very well now (they did not know it before lol...).

A sovereign crisis always possible but liquidity in repos is not necessarily where the issues come out.

"amicus Plato sed magis amica Veritas"

Strange


Total Posts: 1616
Joined: Jun 2004
 
Posted: 2019-12-25 08:07
So here is my understanding of what is going on, bearing in mind that I have not been trading bonds seriously for a some years.

Repo market's been growing rapidly as a function of US debt issuance. That's reflected in the primary dealer balance sheets and primary dealer repo holdings. So you arrive to the point where issuance is high, there are not enough natural outright buyers to buy the bonds quickly, there are not enough carry etc. And when fixed income desks can't sell that debt, then repo desks are asked to finance it. Here we go, issue one is supply into illiquidity.

Then there is the TGA, which is the Treasury General Account - a cash account of the US treasury which is a liability of the Fed. Treasury used to place funds with private banks (so they'd hit reserves) but they have made a decision to keep money in the Fed TGA. This, combined with FRF (Foreign Repo Facility), changed the amount of bank reserves at the Fed. Less reserves means less balance sheet capacity. Combine that with balance sheet restrictions under the new model and you zero-in on problem two, lower balance sheet capacity.

Finally, sponsored repo was partly to blame. Modern repo markets are very complex and different counterparties have access to different parts of the market. First, there is the bilateral market, which is simply a private exchange of cash and collateral between two counterparties. Some of these transactions are sent to FICC for delivery versus payment settlement (DVP). Then there is tri-party, where an agent is responsible for the operations, valuation and collateral management. Finally, there is sponsored repo, where a buy side firm will do a transaction with a sponsoring dealer, who will then send the transaction to FICC for a novation on the CCP that FICC runs (so CCP is now a central counterparty and FICC is the credit backstop for the market). Sponsored repo is relatively new and benefit is that it really reduces balance sheet cost for dealers. However, it does drive the buyside repo flow to the large primary dealers whose balance sheet is already stretched. Problem three, market concentration.

Now, that was a structural explanation of the weakness (repo markets had some issues in 2018 too, FWIW, but these were primarily driven by liquidity). The local issue was a confluence of events like the net increase of 54 billion in US Treasury settling, an estimated 100 billion in cash that corporations took out to pay their tax bills. Also, on September 14th, just a couple of days before the repo volatility occurred, Saudi Arabia's oil installation saw a major terrorist attack - it had some knock on effects in the commodities markets where traders needed to meet margin calls. Plus, Saudis probably took cash out of the markets themselves to cover their own costs. Combine that with stretched balance sheets and concentration and you get a kaboom.

PS. Browsing through the SOFR data is a lot of fun, BTW.

"In Russia, every CDS ends in bullet payment"

rickyvic


Total Posts: 196
Joined: Jul 2013
 
Posted: 2019-12-29 00:22
A more general question is more why the ph... banks are not lending in repo and markets are in the hands of the big 3.
Banks don't really lend in all the markets these days, this is the problem, now this repo spike is also the symptom we see.
Prime brokerage is a mess and if 3 banks stop lending altogether we can say goodbye to liquidity.
These are small credit crunches, we can argue about possible causes forever but from what I see it is a monetary policy issue.

I am feeling like we keep patching an over 10 year old crisis and we are not solving it (we here means governments, central banks, etc...). The fever keeps coming back.


"amicus Plato sed magis amica Veritas"
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