Sunday, April 16, 2017

Basel Report: "Repo Markets are Not Settled Yet"

Global repo markets in transition post-crisis, regulatory changes and central bank stimulus

Author: David Schwartz J.D. CPA

An April 12, 2017 report issued by the Bank for International Settlement’s Committee on the Global Financial System (CGFS) takes stock of the state of repo markets. Drawing on a number of sources, the report surveys the landscape of the repo markets, taking into account the effects of the financial crisis, changes in the regulatory landscape, and the unprecedented period central bank stimulus. 

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Monday, February 27, 2017

Basel Clarifies NSFR Repo Treatment

Author: David Schwartz J.D. CPA

On February 24, 2017, the Bank for International Settlements (BIS) published a new set of responses to interpretation questions related to the Net Stable Funding Ratio (NSFR).[1] This release is a follow up to the initial FAQ published in July of 2016 and includes important guidance concerning the treatment of repo for purposes of calculating the ratio. The purpose of the NSFR to move banks to more stable sources of funding that are less vulnerable to shocks. Banks and financial institutions that rely on short-term financing have raised a number of concerns about the ratio’s treatment and weighting of repo and reverse repo transactions, with some even calling for repo to be exempt from the ratio altogether. The Basel Committee’s FAQ does not address all of these concerns. But the interpretations do provide valuable clarifications to some technical aspects the treatment of repo and securities finance transactions (SFT) for the purpose of calculating the ratio, including netting of repo and reverse repo and RSF factors applicable to secured funding transactions.[2]

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Saturday, January 14, 2017

Fed Report Finds Regulation Harming Repo Markets and Liquidity

Author: David Schwartz J.D. CPA

As we reported in our January 3, 2017 post, a Fed staff report published in December 2016 found that the Volcker Rule was harming bond liquidity. Not a month later, a new Fed staff working paper published this week found that regulations limiting banks’ balance sheets like the Supplementary Leverage Ratio have made repurchase agreements (repos) more expensive for dealers, and this in turn has had negative affects on on liquidity in the cash Treasury market. The authors note that it is well known that repos are widely used in cash market intermediation, especially for shorting. But, until now, it has not been clear how limiting dealer leverage would translate into lower liquidity.  By modeling how dealers use repo to intermediate in the cash market, the authors, Yesol Huh and Sebastian Infante, have identified the direct linkage between repo markets and cash market liquidity.

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Wednesday, December 28, 2016

Is Blockchain the Future of Securities Lending?

Author: David Schwartz J.D. CPA

By now, all but the most strident luddite has heard of Bitcoin, the notorious stateless crypto-currency. Naturally, financial firms and regulators have started to take notice of Bitcoin. But it is not necessarily the currency they are interested in. Rather, they are exploring the technology that makes the virtual currency possible. Computer-driven concepts borrowed from Bitcoin like the blockchain, distributed ledgers, and self executing contracts are starting to become the new frontier in areas like securities lending and repo.  

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Sunday, November 27, 2016

FSB Announces Priorities for 2017

Shadow Banking, G-SIFIs, and Asset Management are among FSB's 2017 priorities.

Author: David Schwartz J.D. CPA

At its November 17, 2016 plenary session in London, the Financial Stability Board (FSB) met to discuss current vulnerabilities and agree on priorities for 2017.  While noting that the global financial system is more resilient as a result of the regulatory reforms introduced following the 2008 financial crisis, the FSB is keeping a close eye on areas of concern like high sovereign and corporate debt, asset quality and profitability issues faced by banks, and unfinished balance sheet repair in some parts of the financial system.  With these and other potential vulnerabilities in mind, the FSB has assembled a list of the areas upon which they plan to focus their attention in the upcoming year.

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