This announcement may not be redistributed or redistributed, in whole or in part, or in any form or manner, without the express written consent of J.P. Morgan. Any unauthorized use or disclosure is prohibited. Receipt and review of such information constitutes your consent not to redistribute or retransmit the content and information contained in this notice without first obtaining the express permission of an authorized representative of J.P. Morgan. There are legal agreements that clients must enter into with the referring member and the FICC that can take anywhere from a few days to a few weeks before a client can participate in a sponsored deposit. Sponsored Repo is a transaction in which a trader sponsors non-broker counterparties to the Fixed Income Clearing Corporation`s (FICC) Cleared Repo platform – a system that clearly reconciles and reconciles repo transactions on US Treasuries. What is the size of the Sponsored Repo market and what are the growth prospects? In summary, sponsored repo is largely a form of repo substitution, with traders moving from balance sheet-intensive repo trading to something efficient so that the capital earned can be reallocated for other purposes. For example, the number of cash repos that support the entire Treasury market has gone from a peak of about 60% to just 10% today. Fixed income financing, also known as a pension, is a type of short-term loan in which counterparties receive cash by reserving guarantees.
Cash borrowers, such as hedge funds, often use repo to fund asset purchases. Meanwhile, cash-rich lenders like money market funds (MMFS) take the other side of the deal to make a profit. In most cases, a trader – often a large bank – acts as an intermediary between the parties to facilitate the transaction. In the short term, FICC is expected to receive approval from the Securities Exchange Commission (SEC) to expand its approved reverse repurchase agreement to other counterparties. How has the world of fixed income evolved? Money market funds that finance securities against ($T) securities reported holding $138 billion in sponsored pensions in December 2018. Although it is only a fraction of the $5.1 trillion gross repo market, sponsored repo has come a long way since mid-2017, when money market funds began to participate in the product. In a detailed report, the J.P. Morgan Global Research team unpacks sponsored repo, a growing market that is taking an important step toward reducing the regulatory costs of bond financing in a post-crisis world. Following the collapse of Lehman Brothers, banks and regulators recognized the risks associated with short-term financing, both unsecured and guaranteed, and introduced a new set of rules.
Banks` capital requirements, such as the Basel leverage ratio and the Global Systemically Important Bank (G-SIB) capital add-on, require banks to hold capital against exposures related to guaranteed loans. In response, traders` activities in the repo market have declined, and the way banks finance themselves has fundamentally changed. “These balances are a far cry from what they were before the 2008 crisis, as post-crisis regulations have limited the number of deposits they can make with customers by significantly increasing the cost of bank balance sheets,” Ho said. In sponsored deposit, FICC mediates between the two sides of trading and allows traders to process trades against each other. This means that the amount of capital that banks must hold is significantly reduced, allowing traders to provide clients with more balance sheet or use the capital for other trades. In a typical assorted book repo transaction, a trader would pay $100 from a cash-rich lender (e.B a money market fund) and then lend the proceeds to a borrower in cash (e.g. B a hedge fund) in exchange for a guarantee. In this context, the trader should raise his own capital against an exposure to the repo of 100 US dollars. “We believe sponsored repo cannibalizes less efficient forms of repo, ultimately freeing up capital and creating more capacity for banks to provide liquidity to bond markets,” wrote Teresa Ho, Joshua Younger, Alex Roever and Ryan Lessing, analysts at J.P. Morgan.
But the upside potential is limited because the FICC limits the number of non-bank members who can participate in sponsored repo transactions to account for the slightly riskier nature of these members compared to “well-capitalized” bank clearing members like US G-SIBs. Current balances are significantly lower because post-crisis regulations have limited the number of repo traders As Roever points out, the gross size of the repo market is currently around $5.1 trillion for primary traders, according to the latest Fed funding data. Of this amount, reverse reverse repurchase agreement – in which a trader lends money in exchange for bonds – amounts to $2.3 trillion. EXPOSURES from CCIF repo to MMFs ($B) have increased significantly over the past 18 months. Please read J.P.`s research reports. Morgan regarding content for more information, including important disclosures. JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively, J.P. Morgan) generally enter a market and act as principals in securities, other financial products and other asset classes that may be discussed in this release. Fed RRP, FICC Repo and other brokers Repo Variation of balances with money market funds at the end of the quarter ($B) The first signs of the financial crisis were bubbling in this corner of the market, also described by the press as a vital element of Wall Street, when traders could no longer roll their large exposures to repo while liquidity dried up rapidly. The Ficc-sponsored repo seems to be filling the doldrums more and more at the end of the quarter, but that offsetting advantage comes at a price, Younger points out.
Traders must give the FICC a guarantee relating to all obligations of their sponsored members and deposit additional capital in the fiCC compensation fund. They may also need to provide additional liquidity in the FICC capped conditional liquidity facility, which is a liquidity buffer that each clearing member must maintain institutionally to support a potential liquidity crisis of the clearing house. Sponsored repurchase agreements give MMFs the opportunity to access collateral on days when they are unable to do so. B-be not available otherwise, for example at the end of the quarter, when banks restrict the use of balance sheets. For hedge funds that lend collateral over liquidity, the advantage lies mainly in the availability of funding. .