Repo madness, FRTB and swaptions switch

The week on, November 2–8, 2019

7 days montage 081119

All clear? Structural shifts add to repo madness

Many things contributed to 10% repo, among them a FICC programme and a surge in overnight funding

FRTB running costs force banks to weigh IMA desk by desk

Risk USA: Some desks “may not be able to pass these more rigorous standards”, says Morgan Stanley FRTB lead

LCH won’t back single fix for swaptions switch

Clearing house pledges to “support” multiple solutions to discounting problem



On September 17, rates on overnight repo – despite being backed by the solid pledge of US govvies – surged to 10% and generated outsized profits for some participants in the normally uneventful marketplace.

The spike in rates has previously been blamed on the unhappy coincidence of Treasury issuances and tax payments colliding to result in a drawdown of excess reserves at the US Federal Reserve.

But now, some are beginning to question whether the repo market has undergone more fundamental and structural shifts.

Fingers are pointed at the Fixed Income Clearing Corporation. Its sponsored repo programme was designed to encourage clearing of the instrument and circulate more cash via sponsor banks standing between lenders like money-market funds and borrowers such as broker-dealers or hedge funds.

But, in a case of unintended consequences, the initiative looks to have resulted in bottlenecks that have forced rates higher. It is claimed the interdealer market is now dominated by a few banks that have a stranglehold over the rehypothecated cash of money-market funds.

The sponsored membership programme has “concentrated cash in fewer hands”, says a repo trader, reducing competition and making severe convulsions more likely.

Another reason for the spike has been attributed to the trend for market participants to favour overnight funding rather than term repo – partly led by hedge funds running fixed-income arbitrage strategies.

At the Risk USA conference in New York on November 6, rates specialists at primary dealers said US Treasury repo is likely to remain volatile into next year, as the leverage ratio limits the ability of dealers to provide funding to clients – and despite the Fed’s best efforts to stabilise overnight rates by injecting $120 billion daily into the market.

Meanwhile, following the repo turmoil, the head of Libor transition for Goldman Sachs has dismissed concerns about the stability of the secured overnight financing rate (SOFR) – an  alternative to the discredited Libor. When repo rates climbed on September 17, the SOFR rate rose to 5.25% – an increase of 282 basis points on the previous day.

As financial contracts linked to SOFR use a compounded version of the rate, averaged out over a fixed period of time, it is actually less volatile than forward-looking term rates such as Libor, according to the liquidity management expert.


Systemic US lenders have cut ties with the UK since the 2016 Brexit vote. Loans and derivatives claims of the eight US global systemically important banks on UK private sector entities dropped by 37%, to $295 billion in the first quarter of this year from $466 billion in the first period of 2016.


“It will become an unacceptable scenario if this continues – cost of doing business will be too high in many product categories” – Lee Braine, director of research and engineering at Barclays, says bloated post-trade expenses could put some business lines on the chopping block if the industry fails to innovate, in particular if they don’t adopt the common domain model, the International Swaps and Derivatives Association’s data standardisation project.

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