The Fed continues to intervene in the repurchase market
What's up with that?
One of the opinion writers at Market Watch wrote late last week that the Fed is in “stealth” intervention mode after the Fed injected $99.9 billion in temporary liquidity into the financial system and $7.5 billion in permanent reserves as part of a program to buy $60 billion a month in Treasury bills.
But market demand for overnight repo operations far exceeded even the $75 billion the Fed allocated. So, on Wednesday, the Fed added $45 billion in addition to the $75 billion repo facility for a daily total of $120 billion.
There’s nothing stealth about continuing to pump billions into the repurchase market long after it said it would be needed.
The Fed originally said it planned to conduct daily repo operations until October 10. That intervention has now gone on beyond the end of the month of October with no end in sight.
Something is cooking but no one who knows what is telling the rest of us who is suddenly chronically illiquid.
I got a nice link from TheCorporateCounsel.net when I live blogged a hearing on SEC oversight by the House Financial Services Committee. That’s because Rep. Gregory Meeks quoted from my recent story about the repo disclosure rule the SEC never passed while questioning SEC Chairman Jay Clayton.
In 2010, the SEC proposed a rule in response to Lehman Brothers’ lack of disclosure of its Repo 105 liabilities. Called “Short term borrowings disclosure,” it said “a critical component of a company’s liquidity and capital resources is often its access to short-term borrowings...”
Events during the crisis and now show that these types of arrangements “can be impacted, sometimes severely and rapidly, by illiquidity in the markets as a whole.”
In Sept 2018 I wrote about this to mark the Lehman 10-year anniversary.
In a comment letter to the SEC then Sen. Carl Levin wrote, “Inaccurate accounting treatment of repurchase agreements was not confined to Lehman Brothers. Other investment banks, such as BAC and Citigroup have acknowledged” also recording repos as sales versus financing. On Oct 31, 2011 MF Global, a global broker-dealer led by former N.J. Governor Jon Corzine, collapsed. MF Global could not meet margin calls when the value of European sovereign debt it used as collateral in repo transaction collapsed.
Back then Izabella Kaminska of FT.com’s FT Alphaville wrote, “If ever there was an example of an ‘overnight repo Black Swan’ event, MF Global’s “repo-to-maturity” laddered trades seem to be it. Though, in this case, they’re probably better described as the realisation of the ‘short-term repo Black Swan’.”
MF Global had recorded profit upfront from investing in the sovereign bonds and then using them as collateral in so-called “repo-to-maturity” contracts without fully disclosing its repo loan liabilities. The SEC’s 2010 proposal for better disclosure of repos on companies’ balance sheets was never finalized.
Back in September 2018 I quoted Gregg Gelzinis, a research associate at CAP, saying that even if the proposal was approved, the U.S. bilateral repo market would still be in the shadows.
In triparty repos, a clearing bank provides collateral valuation, margining, and services to ensure terms of the repo are met. In early 2017 the FICC processed about $400 billion each day in same-day settling overnight centrally cleared repos collateralized with U.S. Treasurys.
In a bilateral repo, the lender drives the valuation and margin requirements on collateral pledged by the borrower. “There’s a gap here in a market that was systemically important during the financial crisis and still is,” said Gelzinis at time.
The Fed’s latest intervention started back in mid-September when borrowing rates for repos suddenly spiked. They hit 5% on Sept 16, up from 2.29% late the prior week and significantly above the target range set in July by the Federal Reserve of 2% to 2.25%. Before the NY Fed intervened the overnight rate went to a high of 10% on Sept 17.
It was the NY Fed's first such operation in a more than a decade. The last occurred in late 2008.