The Second Part Of The Quantum Of Money: Results From The Triparty Repo Experiment

Taking our limited repo example from Part 1 a step further still, in real-world operation a bank might put up any number of securities – including any it might have just that day obtained full title too – to secure financing all at once. Thus, there are groupings of securities over which the bank has varying degrees of control – some outright purchases, some shorted, some borrowed, others themselves part of complex iterations (like transformation) – pledged in one or several SFT’s, not just repo but also any other funding subset via derivatives.

In most realistic cases, it’s a blending of assets against a blending of liabilities.

If stretching our example a bit further, a bank has pledged four types of assets to secure just a single funding operation then the relationship (and, yes, co-relationships) of those assets becomes a new parameter by which the bank must consider.

Putting up, say, an off-the-run Treasury note, an on-the-run Treasury bill, an agency MBS, and some kind of lower quality junk corporate, altogether to some extent overcollateralized, as the basis for just one SFT this leaves the bank exposed to any changes in the context of those collateral pieces. What happens, for example, if the market for off-the-run Treasury notes becomes even more uncertain and thus illiquid than it already is?

Or if lower-quality jump corporates suddenly are in danger of being perceived as no better than pure junk?

This would pressure the better parts of the collateral grouping, among many groups, to hopefully make up any (overcollateralized) difference without demanding much more of either. If the over-collateralization gets used up entirely, then the bank would have to reach into its portfolio of assets for only one or the other to post, on net, in bespoke as well as triparty repo just to maintain the same level of liabilities.

And if it didn’t have more of on-the-run Treasuries or liquid agency MBS? Then that’s getting into Bear Stearns/AIG/Lehman territory; those who ended up getting the dreaded call from the triparty repo custodian no longer willing to extend the same daylight overdraft generosity for fear of being left on the hook from some unsettled or imbalance between the bank’s assets for liabilities (too many of the former unable to secure enough of the latter).

In the example immediately above, we’d expect that collateral for our bank would begin to concentrate in the more liquid and usable formats; less off-the-run Treasuries, fewer corporates, leaving mostly on-the-run UST’s (bills) and hopefully the same for agency MBS to conduct the same level of funding.

And if this happens for the one bank, we’d very much expect to find the same thing happening across the entire system; collateral becoming relatively more concentrated into whatever’s left as the most usable.

Conversely, we’d also expect to find that during periods of risk-taking or especially reflation (risk-taking done for suspicious reasons) there’d be a higher level of collateral dispersion. It’d make sense to use all kinds of collateral across various SFT’s in order to more efficiently match assets and liabilities, particularly when higher-return riskier assets could fetch relatively decent funding terms.

In yet another case of (like TIC) of regulatory authorities collecting information but having no idea what they are looking at or what to do with it, the Federal Reserve Bank of New York obtains a wealth of data on triparty repo which is reported directly via call reports from JP Morgan and Bank of New York. The data isn’t sampled; this is it, all of it, everything that goes on in this segment.

However, “all of it” refers only to triparty repo rather than the entire repo market which is far larger still. In other words, much perhaps a majority (there is some debate) of repo and then a whole wide range more of SFT’s in derivatives aren’t included anywhere in these figures (or really any others). We’re still subjected to limitations regarding the totality of the phenomena, only these limitations are somewhat (hopefully meaningfully) less.

Among the parameters, FRBNY collects are those like “number of repos” and “number of observations.” The former is simply the raw number of individual repo transactions reported by the triparty custodians in any given time period (monthly as presented here, up through April 2021). The other, number of observations, refers to how many other data points which might be included with a repo transaction: such as the number of different types of repo collateral used in them.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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