From Icap’s latest repo weekly report:
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ICMA’s European Repo Council has taken a look at the role of haircutting repo collateral in the current crisis on Wednesday. It’s decided that, overall, (and especially in Europe) there is little reason to believe the practice of discounting repo assets’ market value has had much of an impact.
This is mainly for two reasons, writes the reports author Richard Comotto. First, there is a lot of misunderstanding in the market as to how haircuts and margins actually work. Second, the practice in Europe is very different to that in the United States. Read more
UBS announced lacklustre results on Tuesday, saying it expected further weakness in investment banking in the first quarter.
But the bank also provided details of some interesting underlying trends at the bank, funding wise. The following table taken from the bank’s results statement provides a good summary (click to enlarge): Read more
The use of risky collateral including equities and structured finance has returned to pre-crisis levels in the US repo market, the FT reports. A Fitch Ratings study found that structured finance assets accounted for about 20 per cent of collateral. “Almost half of this collateral is subprime and Alt-A residential mortgage-backed securities (RMBS) and collateralized debt obligations,” the report adds. Reasons for the rise in use range from a shortage of safer assets, to returning liquidity in RMBS, to the hunt for yield among money market funds. Read more
We’ve already brought you one collateral crunchy statistic from the Bank of England’s latest monetary and finanical statistics. But here’s another interesting trend from the Bank’s gilt repo and stock lending numbers.
We should note that we have no idea how meaningful this is, but the trend is interesting nonetheless. Read more
In part two, the flight of the US money market funds seems to have intensified, but the outflows have been more clearly redirected… namely into Australian, Canadian and Japanese banks instead. Read more
We all know the story in the public repo market. The European Central Bank has provided three years worth of funding against the widest range of collateral it has ever dared to accept, and is preparing to do it all again in February. We know the type of collateral it accepted, and how much funding it provided.
But what, pray tell, is the story in the private interbank repo market? Read more
From the ECB’s Mario Draghi on Thursday (our emphasis):
RTRS-ECB’S DRAGHI SAYS REDUCING LENDING WOULD BE THE WORST OPTION OF ALL 11:50 15Dec11 Read more
Look at any financial market long enough and it starts to resemble the repo market.
Conventional sales and buybacks. Islamic finance. Covered bonds. Commodity contango or backwardation trades. Most of them have some form of sale and later buyback of assets, inbuilt into the trade. The level of the buyback implies a yield-type return, exploiting the market’s current preferences. Read more
There are a growing number of voices suggesting that much of the Eurozone funding crisis could be simmered by addressing one of its most identifiable symptoms. The quality collateral crunch in the system.
As we’ve noted before, there are many reasons to think that the trend towards ‘quality’ collateralised funding is having as much of an impact on the valuation of bonds in both private and central bank funding markets, as the perception that European sovereigns might be insolvent. Read more
We dig dig dig dig dig dig dig from early morn till night
We dig dig dig dig dig dig dig up everything in sight
We dig up diamonds by the score
A thousand rubies, sometimes more
But we don’t know what we dig ‘em for
We dig dig dig a-dig dig Read more
MF Global lost ‘effective control’ of its sovereign bond assets. This gifted the broker some rather favourable accounting treatment. The broker’s clients, meanwhile, wanted to keep effective control of their own assets, and not just in the accounting sense, but in a very real sense.
As creditors and clients pick over the corpse of MF Global, reaching into its pockets for anything that can compensate them, we’re learning a lot about accounting for repos, and about what does and doesn’t work when it comes to protecting client assets. Read more
Wednesday’s central bank intervention is impressive in its symbolism but unlikely to do much more than buy eurozone leaders a few days.
RBS’ US rates team has provided a useful analysis of the move. The immediate background to the intervention, according to the strategists, is that European institutions have been having trouble funding in the US repo market so have turned to the currency markets instead — buying USD then reversing the transaction three or so months later. Hence the recent stress in the currency basis swap markets. Read more
Icap’s weekly European repo report shines some light on recent eurozone bond developments.
For example, it blames illiquidity in German bond markets for causing chaos in the asset class rather than a sudden change in mindset. The illiquidity, it says, is specifically related to the perceived virtue of the asset (everyone wants to buy the bonds outright) rather than a sudden rush for the exit. Read more
Collateral management and secured lending are the big post-crisis themes in financial markets.
But what happens when a strategy that’s designed to protect the system backfires? Not because you don’t hold enough collateral to cover the counterparty risk, but — as it happens — because you’ve given too much of it away as haircut. If your counterparty suddenly turns out to be more fragile than you anticipated, you could find yourself with the equivalent of an unsecured exposure. Read more
The estimated hole in MF Global’s customer accounts has doubled in size to $1.2bn, astonishing traders as the investigation into the broker’s failure enters its fourth week, the FT reports. The new figure, from the bankruptcy trustee for MF Global’s US brokerage, is equivalent to almost a quarter of the $5.45bn in client funds that the company was required to hold separately from its own funds. The shortfall has blemished futures markets and left thousands of traders with insufficient margin deposits. Failure to separate customer and house funds is a violation under US law. “It’s as serious a situation as one can imagine in these markets,” said Mario Cometti, a lawyer representing MF Global customers. “If such an incredibly tremendous shortfall could have occurred, then there’s obviously huge problems with oversight.” Estimates of the shortfall have fluctuated since the broker-dealer filed for bankruptcy on October 31 after failing to douse fears over its exposure to European sovereign debt. The Commodity Futures Trading Commission was first told the deficit totalled about $900m, but more recently put it at $600m. Read more
Another stridently penned letter from Jefferies that seeks to reassure the markets about its exposure to Europe and worries about access to short-term funding:
The note rehashes a few points the broker had already made in prior statements, but it does give new detail on its repo and reverse repo activity, something we’d wondered about previously. Read more
Many might not be aware, but the Fed introduced a quarterly survey “on changes in credit terms and conditions for securities financing and over-the-counter derivatives transactions” over a year ago.
The point was to shed light on the mysterious practices of the shadow banking sector and in particular the daily goings on in the repo finanicng markets. Read more
For today’s edition of history rhyming, have a look at this (seminal) piece of research from Citigroup’s Matt King.
On September 5 2008 — just weeks before Lehman Brothers collapsed — the Citi credit strategist sent out a research note carrying the provocative title of “Are the brokers broken?” The thesis was simple: America’s broker-banks were funding nearly half their own assets through repo transactions. Read more
Or, old-fashioned fun with default correlation.
By this point it is not looking good (if it ever really did) for the touted levering of the EFSF’s resources by borrowing from, or insuring in some way, the European Central Bank’s operations. The reasons for this are partly legal, mostly German, and in the last resort pretty much all to do with the leverage and/or loss tolerance being neither practical nor credible. Read more