Good report, thanks, and another example of blood flowing around the clot.
- Financial sector in a shambles
- A2 GDP now forecast at 3% or more helped by tax cuts/rebates
So as the financial sector worsens the government can cut taxes to sustain output and growth.
Seems like a good trade off to me – cut taxes and shut down the financial sector!
Not only has this become a major focus of the Repo market and gotten some regulator attention, but it has gotten a lot of interest and questions from AVM Repo Commentary readers. I am speaking about Direct Repo or non-Traditional Repo. So, I will explain the concept further. This is the expansion of the Repo market to improve liquidity by pairing collateral providers directly with cash providers. This enhances the liquidity typically provided by the broker/dealers (who pair collateral providers with cash providers among themselves in the interdealer broker market and BrokerTec). These broker/dealers are currently balance sheet constrained due to: reduced capital and difficulty raising capital; taking on their SIVs’ collateral ; taking on their ARS collateral; and management directive to reduce balance sheet and reserve it for assets with higher ROA than repo. The broker/dealers are actively financing their collateral with the Federal Reserve, but have little dry powder to take on collateral from typical Repo collateral providers. This has a ripple effect in the Repo market, causing not only the collateral providers to scramble for financing but also the cash providers to eventually have trouble finding enough Repo collateral offered by the broker/dealers. The first ripple is already being felt by the market and the second ripple may now be showing up. So, the Repo market is evolving to transact Direct Repo between the cash providers and the collateral providers, which helps the broker/dealers, who still want to sell collateral to clients but don’t have the room on their balance sheet to then finance that collateral. It also, logically, compresses the bid/offer spread, which has widened dramatically due to the new ROA guidelines at most broker/dealers. As an example, Agency MBS pools have a 50bp bid/offer spread 1month (as opposed to the traditional 10bp) and Investment Grade Corporates have a 70bp bid/offer spread 1month. Direct Repo could result in significant savings for both the cash provider and the collateral provider. Other terms, such as length of trade and haircut, may also be more favorable to both sides in Direct Repo. Obviously, both the cash provider and the collateral provider would have to do Credit analysis of their counterparties, but they do that already with their broker/dealers as counterparties. Also, Direct Repo can be done as Triparty Repo, reaping the benefits of that product (no fails, less administrative work, third party pricing, third party oversight, etc.) So, this Direct Repo does not replace traditional Repo through broker/dealers, but just picks up the slack in the market, reduces the balance sheet bottleneck, and helps the broker/dealers continue to do business without having to turn away Repo clients. Anyway, I don’t want to bore you any further, so if you would like more information of how AVM Solutions can provide Direct Repo and pair cash providers with collateral providers, as well as broker/dealers, give me a call or an email.
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