The Repo Market Rewire
the structure of the most crucial dollar funding market is changing
The major shift to a secured monetary standard is now complete. Trillions in dollar loans, once priced by major financial players, are priced using rates in the repo market, the market for secured cash lending. But after several mishaps, even the secured standard has proven defective. Subsequently, with leaders vowing to fix the latest flaws in their new system, the most systemically crucial funding market is set to evolve once again. The Repo Market Rewire™ is approaching.
On December 13th, 2023, U.S. monetary officials announced sweeping changes to the Treasury market, not only to strengthen America’s sovereign debt goliath but enhance its major liquidity greaser: the repurchase agreements market, or “repo” for short.
Every day, trillions of dollars in cash and Treasury securities change hands temporarily via repos to facilitate both short-term cash investments and highly leveraged speculative trades, fostering a liquid market for U.S. sovereign debt. Money market funds (MMFs) must earn a return on investors’ cash while dealers need funding to provide leverage to their customers, primarily hedge funds seeking to profit from arbitrage in the Treasury cash market. Meanwhile, the Fed stands guard to bridge any imbalances emerging from repo market turmoil, supplying emergency cash investments via its reverse repo facility, the RRP, and emergency cash loans via its Standing Repo Facility, the SRF. Even with these central bank defenses in action, however, the COVID market panic and the 2019 “repocalypse” — among other episodes — have urged leaders to reinforce the repo market’s plumbing with a more effective glue: the widespread expansion of central clearing. Let’s dive deeper.