The Big Short 2: Repo Markets
- Thread starter Pekelo
- Start date
Who wrote this? When someone fails to put a name to the editorial, it`s raises questions...
And Lebanon... likely default Monday. Who are the counterparties?
Lebanese Pound is (currently)pegged to USD btw.
Lebanese Pound is (currently)pegged to USD btw.
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Whoever wrote this, has very little understanding of the repo markets, so most of the conclusions are also wrong.
~30 billion, mostly held by a bunch European pension funds. Certainly not an existential risk like PIGS were.
Some other guy made a similar remark, but said the bet should be against Japanese banks. When he was asked why?:
u/thebondking
"High debt, high cost of funding, highly leveraged to their own equity market, high ties to shadow banking.
JPM has a deposit to loan ratio of 1.6. Aka 160% in deposits to fund the loans.
Japanese banks run like 0.5 ratios. They also have ties to shadow banking far deeper than the US.
The only think saving them is their government bailing out the banks on a frequent basis.
One day the government won’t have enough to bail out their $2 trillion banks.
My firm has a 3 year tenor on US banks. We have a 30 day tenor on Japanese banks. You don’t want to be caught holding those debt bombs."
Here is a brief overview of what's that all about. The general idea is as follows:
- Repo is when a party D buys a bond from party B with an agreement that tomorrow they will return the bond in exchange for cash + interest (effectively "re-purchasing" it for higher price, hence repo). For any entity that holds a lot of US treasuries on the balance it's a primary tool for getting short-term cash on demand, similar to a checkbook for a regular household. Now we can get to how it became dysfunctional in the recent years.
- US debt issuance has exploded in the recent past and the repo market has grown with it. 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 (as the curve is too flat) etc. And when fixed income desks at primary dealers can't sell that debt, then repo desks are asked to finance it. So supply is a big portion of the problem.
- Then there is the TGA, which is the Treasury General Account. It's 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.
- Banking regulators have been pressuring banks to hold more cash as opposed to the treasuries. That puts a lot of pressure on the primary dealers (who are now all bank holding companies) to avoid lending in the repo markets.
- Finally, there is a problem with the sponsored repo. 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 naturally drives the buyside repo flow to the large primary dealers whose balance sheet is already stretched.
TL;DR
I understand what the repo market is.
Thanks.
We can disagree on the significance and importance of the disruptions going on in the repo market. It's OK.
I understand what the repo market is.
Thanks.
We can disagree on the significance and importance of the disruptions going on in the repo market. It's OK.
I think we both agree on the significance, it's the actual result that we disagree on. What is the possible outcome of these disruptions in your opinion?
PS. as a concept, repo is very simple - as a machine it's hugely complex; I used to be involved some years ago and still the details are very much over my head
Hugely complex... This is an understatement!
Neither one of us, in fact, I guarantee no one on ET, has any accurate "behind-the curtain" information. And that's because those wizards are not talking!
Honestly, the recent cut, the dot-plot for even more in just a matter of days, and the history being made in the 10's has me on edge. And this is only looking at USA, when the real problem is elsewhere, and because no one is talking, elsewhere is unknown. Pekelo mentioned Japan. I gravitate towards EU. The Lebanon default, while relativity small has potential legs in the Mid-east, therefore oil kingdoms, (petro)dollar pegs, and as you mentioned, EU banks and those counterparties. All in all it is quite confusing, and gives me a headache. Unfortunately, none of us are on the memo distro list.