Assessing the options
04 November 2014
Where will financial institutions turn next for funding, asks Markit Securities Finance’s Steven Baker
Image: Shutterstock
Triparty repo represents what many consider the bloodline infrastructure of our financial system and it is the main source of funding for banks and short term cash investment for thousands of buy-side entities.
In April 2014, we ran a study utilising our US triparty repo dataset that reflected the following conclusions about this critical market for collateralised cash loan and borrow trading activity.
Our study found that after much anticipation, equity repo and longer term funding were finally taking hold as market participants respond to regulatory changes. A few key findings:
Longer dated funding was growing at a faster rate than the short dated universe.
Equity triparty balances had grown nearly 20 percent over the study’s six-month period.
Greater demand for equities was reflected by a narrowing rate spread over US treasuries.
The question today is: “How are we doing now?” The answer, based on an updated analysis of our data for the year-over-year period between June 2013 and June 2014, is as follows:
Banks continue to push funding maturities for equities beyond one month.
Equity triparty balances have grown another 20 percent.
Relative demand for equities versus treasuries and their overnight rate spread were unchanged.
As Figure 1 shows, the proportion of total equity funding balances by term to maturity appears to be concentrating between one and three months to maturity. Up to one month funding balances decreased 9 percent, and over three months by 11 percent, while the one to two month and two to three month segments increased dramatically by 62 and 136 percent, respectively.
However, despite dramatic increases in equity funding balances of between one and three months to maturity, as Figure 2 shows, the decrease in the heavily weighted over three-month period left the total weighted average maturity of equity funding unchanged.
Figures 3 and 4 show the proportion of equity to treasury overnight funding and their rate spread over the one-year period of our study.
Figure 3 shows a decline in the relative overnight funding balance of equities to treasuries from 2.9 to 1.5 percent. This decline appears to be reflective of the movement from under one month into longer dated maturities for equities, which we did not find occurring for treasuries.
Figure 4 shows overnight rate spreads were relatively volatile for the period of our study. Although ending unchanged, the spread dropped sharply in June 2013 at the same time that relative funding and investments in equities versus treasuries rose sharply.
This repeat pattern in our data highlights the relationship between the relative levels of funding and investment and rate spreads, widening when relative funding increases and narrowing when it decreases, emphasising how knowledge of collateral flows is a supportive indicator of future rate levels.
Markit’s securities lending forum in March 2014 highlighted term transactions as a key opportunity for the industry over the coming years.
As ever, regulation is driving this shift as Basel III and the US Dodd-Frank Act both have measures aimed at making banks less reliant on short term, and potentially more volatile, funding by placing higher capital cover requirements on liabilities with a maturity date under 30 days.
The quest for yield and a relative scarcity of high quality collateral was also discussed with equity funding identified as another avenue of opportunity for the industry.
To this extent, more than 70 percent of delegates polled during our forum thought that equity and lower quality fixed income collateral will play a greater part in the financial industry.
Our US triparty repo dataset sourced from BNY Mellon Broker Dealer Services validates the sentiment from the securities lending forum with observed shifts towards longer term funding and a greater use of equity collateral.
In April 2014, we ran a study utilising our US triparty repo dataset that reflected the following conclusions about this critical market for collateralised cash loan and borrow trading activity.
Our study found that after much anticipation, equity repo and longer term funding were finally taking hold as market participants respond to regulatory changes. A few key findings:
Longer dated funding was growing at a faster rate than the short dated universe.
Equity triparty balances had grown nearly 20 percent over the study’s six-month period.
Greater demand for equities was reflected by a narrowing rate spread over US treasuries.
The question today is: “How are we doing now?” The answer, based on an updated analysis of our data for the year-over-year period between June 2013 and June 2014, is as follows:
Banks continue to push funding maturities for equities beyond one month.
Equity triparty balances have grown another 20 percent.
Relative demand for equities versus treasuries and their overnight rate spread were unchanged.
As Figure 1 shows, the proportion of total equity funding balances by term to maturity appears to be concentrating between one and three months to maturity. Up to one month funding balances decreased 9 percent, and over three months by 11 percent, while the one to two month and two to three month segments increased dramatically by 62 and 136 percent, respectively.
However, despite dramatic increases in equity funding balances of between one and three months to maturity, as Figure 2 shows, the decrease in the heavily weighted over three-month period left the total weighted average maturity of equity funding unchanged.
Figures 3 and 4 show the proportion of equity to treasury overnight funding and their rate spread over the one-year period of our study.
Figure 3 shows a decline in the relative overnight funding balance of equities to treasuries from 2.9 to 1.5 percent. This decline appears to be reflective of the movement from under one month into longer dated maturities for equities, which we did not find occurring for treasuries.
Figure 4 shows overnight rate spreads were relatively volatile for the period of our study. Although ending unchanged, the spread dropped sharply in June 2013 at the same time that relative funding and investments in equities versus treasuries rose sharply.
This repeat pattern in our data highlights the relationship between the relative levels of funding and investment and rate spreads, widening when relative funding increases and narrowing when it decreases, emphasising how knowledge of collateral flows is a supportive indicator of future rate levels.
Markit’s securities lending forum in March 2014 highlighted term transactions as a key opportunity for the industry over the coming years.
As ever, regulation is driving this shift as Basel III and the US Dodd-Frank Act both have measures aimed at making banks less reliant on short term, and potentially more volatile, funding by placing higher capital cover requirements on liabilities with a maturity date under 30 days.
The quest for yield and a relative scarcity of high quality collateral was also discussed with equity funding identified as another avenue of opportunity for the industry.
To this extent, more than 70 percent of delegates polled during our forum thought that equity and lower quality fixed income collateral will play a greater part in the financial industry.
Our US triparty repo dataset sourced from BNY Mellon Broker Dealer Services validates the sentiment from the securities lending forum with observed shifts towards longer term funding and a greater use of equity collateral.
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