11/18/2015 Repo markets on the wane The Banker
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Repo markets on the wane
By Matthew Karwacki | Published: 12 November, 2015 | Comment on this article
With mounting regulation and the collateral drying up, activity in the repo market, the main avenue for shortterm financing on Wall Street, is continuing
Repo market volumes have reached a new low, continuing their steady decline since the 2008 global financial crisis. According to data from the US Federal Reserve (the
Fed), the outstanding notional of repo and reverse repo transactions is now below $4000bn, the lowest level since 2002 (see charts one and two).
Repos saw most active use in the runup to the financial crisis, as banks used the market to increase their leverage. Volume then halved in a matter of months as
investors fled to quality and became reluctant to lend out securities. After the initial panic, activity in the market recovered to about $5000bn in 2010 and has been on a
downward trajectory since.
This decline is, in part, due to regulation. One of the main postcrisis supervisory initiatives was to steer banks away from shortterm funding. One way this was done
was by requiring banks to hold higher capital against their repo transactions, eating into the narrow margins offered by the product.
A new 5% leverage ratio also added to the strain.
Collateral scarcity has also contributed to the weakness of the market. About 90% of repo transactions are completed against a government security of some sort and
since the crisis these have been in high demand (see chart three).
Under the stimulus, the Fed vacuumed up unprecedented amount of US treasuries along with mortgagebacked securities, squeezing the supply of main collateral on
the market. Investors also moved into government debt as a safehaven asset.
It seems that the downward trend in repo is still far from bottoming out. By 2017, the banks will have to be fully compliant with liquidity coverage ratio (LCR), which will
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