Tuesday, September 16, 2008
Repo sector scramble - FT
Banks scrambled for cash yesterday in the repurchase or repo market as they sought to fund assets and the Federal Reserve eased restrictions on types of securities that could be used in its liquidity programmes. The level of borrowing rates was highly volatile in the repo market and there was a strong preference for holding Treasury debt, rather than other securities, given its safe haven status. Scott Skyrm, senior vice-president at Newedge, a repo broker said: Treasury repo "finished with a volatile, but functioning market, with no significant problems." In contrast, repo trading for agency, mortgage, and corporate debt was a lot tougher and "at times there were no bids for any lower quality credit paper." The demand for cash and banks' reluctance to lend to each other pushed the effective Fed funds rate to a range of 6-8 per cent. That ultimately sparked a massive injection of liquidity from the Fed. The Fed injected a further $50bn after an initial $20bn failed to stop the funds rate from rising. It was the largest provision of funds since September 2001. Late in New York yesterday, the effective funds rate was back below 2 per cent. It was expected to head lower, as banks were offloading excess funds to other institutions. The Fed also sought to bolster the tri-party repo market in which banks borrow funds for short periods of time via either Bank of New York Mellon or JPMorgan, who act as custodian banks for repo investors. Lehman and other institutions rely heavily on the repo market to fund operations. They borrow cash from investors and post collateral that includes securities backed by commercial and residential mortgages. A senior repo dealer said: "While it is early days, all indications are that investors using the tri-party market are hanging in and Lehman is going through an orderly wind down." The Fed helped matters by broadening the types of collateral dealers can post for cash loans through the Primary Dealer Credit Facility (PDCF) and its Term Securities Lending Facility (TSLF) so that they closely matched the collateral accepted in the tri-party repo market. Tim Backshall, strategist at CDR, said: "This is a positive step, [adding] tri-party repo collateral to calm markets, but should not be seen as anything other than another band-aid. Our banking system cannot be fixed until we all face up to the real losses from the housing market and these facilities buy time for that process to work out but do not solve the valuation differences." The loosening in collateral for the PDCF came after 10 dealers said they would form a $70bn stabilisation fund and provide collateralised borrowing for members for up to one-third of the facility for any one bank. The Fed meets today and interest rate futures were pricing in a strong chance of cut in the funds rate to 1.75 per cent. Some analysts said the Fed may hold rates at 2 per cent.