Some of the largest domestic banks have been limited in their ability to participate in the repo market, helping to fuel September’s ‘repocalypse’ and the subsequent funding crunch. This is in part due to the fact that participation in these trading operations can increase banks’ capital requirements and, in some cases, even result in a higher G-SIB surcharge. According to a recent article in Financial Times, G-SIBs such as JP Morgan or Goldman Sachs have found new ways to continue trading in the repo market without facing the same regulatory burden as with traditional repo operations. Banks are using total return swaps (a derivative position that synthetically creates returns tied to Treasuries without actually owning the securities) and sponsored repo deals (where the Fixed Income Clearing Corporation acts as a central clearing house that allows dealers to net transactions against each other), two ways to mimic traditional repo trading but with lower capital requirements. It is expected that these efforts by U.S. G-SIBs and the Fed’s repo interventions should help alleviate another potential spike in repo rates at year end thanks to increased liquidity in the market.

The Credit Team wishes you all a Happy New Year!