The Liberty Street Economics blog of the Federal Reserve Bank of New York provided a good analysis this week of the summer’s UST settlement fails spike.
For those unfamiliar, settlement fails in US Treasury securities rose to their highest level in more than five years in June, with DTCC figures reaching more than $1.2 trillion in gross fails for the month:
Everyone in the market is suddenly talking about the spike in repo fails.
But here’s the thing. Repo fails need to be seen in context.
Yes, this chart from BoAML makes the recent June spike look significant:
Check it, from JP Morgan’s Flows & Liquidity team:
The 233 repo fails in the month of June is four times larger than the typical monthly pace of 60-70 and the trend is quite suggestive. (A fail is where one market party fails to deliver the security or cash it had promised to send to another entity within a specific time frame. It’s a problem for both buyers and sellers since it means they could have to go and buy them out in the open market for what could be a higher or lower price.)
From JPM, with their emphasis: Read more
Whether one considers them a systemic problem or not is definitely debatable. Read more
Thanks to Mario Draghi’s double installment of 3-year LTROs this year and last, it’s been a while since we’ve had to worry about dysfunctions in the European repo market. Indeed, it wasn’t that long ago that the market’s problems appeared fully contained. But, could we have spoken to soon?
News now comes to us of another case of “causation or correlation?” striking European bond markets. This time relating to Spanish collateral. Read more
Here’s an interesting chart that’s just landed in our inbox.
It comes courtesy of Fred Sommers at Basis Point Group, a firm specialising in the analysis settlement fails across the financial industry: Read more
Remember Europe’s little security settlement problem (especially in ETFs)?
Seems the European Commission has finally decided to take some action. Read more
It’s been a while since FT Alphaville looked at settlement fails, but the following chart from RBC Capital Markets did catch our eye this week:
David Wessel over at the Wall Street Journal has followed up on a story FT Alphaville has been covering for a while. That the world economy is running out of super-safe financial assets, and that this is doing untold damage to central banks’ abilities to control interest rates (the last bit is our spin).
He raises a point which we think is pretty important. The fact that all this asset encumbrance really started back in the mid 2000s — and was possibly the reason for Alan Greenspan’s famous yield conundrum, when the Fed chairman declared he couldn’t rationalise why longer dated yields would not budge higher despite Fed rate hikes. Read more
Just when you thought it couldn’t get any worse… Jean-Claude Juncker, Luxembourg Prime Minister and president of the EuroGroup speaks:
Nov. 16 (Bloomberg) — Germany’s debt level is a “cause for concern,” Luxemburg Prime Minister Jean-Claude Juncker told the General-Anzeiger newspaper. “Germany has a higher debt than Spain,” Juncker was quoted as telling the Bonn-based newspaper in an interview to be published tomorrow. “The only thing is that no one here wants to know about that.” While Greece is on the right path to consolidate its budget, it’s not yet time to “see light at the end of the tunnel,” Juncker was cited as saying. If Greece were to leave the euro, it would create a “disastrous scenario,” he said. Read more
Well this is embarrassing. Turns out that Banca D’Italia released its latest financial stability report on November 2.
It’s a shame we missed it because it is literally jam-packed with market info. Worth a read on all fronts. Read more
FT Alphaville has referred in previous posts to the emerging global settlement failure issue. We’d now like to address the curious case of settlement fail patterns across the repo universe.
As we have already noted, what started off as a Treasury market issue moved quickly into the Mortgage Backed Security (MBS) market, as and when authorities introduced failure penalties in the former. Read more
What if the persistent number of settlement fails was deliberately done?
A sort of unconventional financing for the market participants doing the failing, if you will. Read more
Settlement fails are on the rise and many are beginning to worry about the systemic implications associated with a market culture that routinely shuffles the problem under the carpet. Particularly, they worry that fails are beginning to migrate to new asset classes, like exchange traded funds.
FT Alphaville spoke this week about the matter with Susanne Trimbath of STP Advisory services, an expert in the field who routinely appears as expert witness in cases involving settlement issues. Read more
The repo rate normally trades closely to money market rates. This is sometimes referred to as the general collateral rate. But sometimes a particular security is in demand for borrowing purposes. This is because there are many dealers who have gone short of that security.
In this situation the cost of borrowing the security increases and depending on supply and demand conditions the repo rate can fall significantly. It can end up several percentage points beneath the prevailing money market rates. And in extreme situations a negative repo rate can occur. Read more
How worried should investors be about rising settlement fails?
In the opinion of the Kauffman Foundation, very. Read more
Finally, a report that dares to outline the previously-taboo: Exchange-Traded Funds may pose a greater systemic threat to markets than high-frequency, or algorithmic, trading.
Writing for the Kauffman Foundation, a Kansas City-based private and nonpartisan foundation, authors Harold Bradley and Robert E. Litan lay the case out in a 86-page report on Monday. Both these guys have testified to the US Congress on things like market structure and financial crises, so they’re well worth listening to. Read more
Fails to deliver — to the moon!
Amongst the additional stimulus measures being pondered by analysts ahead of Tuesday’s FOMC meeting is a possible quantitative move which would see the Fed reinvest paydowns from its MBS portfolio back into the sector or by buying Treasuries.
But according to Barclays Capital there are issues here. Especially when it comes to reinvesting in MBS securities. As they noted this week: Read more