Reforming REPO: Can Liquidity & Safety Co-Exist?

In September of 2008, the global financial system was brought to its knees as the extension of credit and the flow of capital around the world came to a screeching halt. Over-the-counter (OTC) derivatives were quickly identified as the main culprit and a new regulatory regime was established to reduce leverage, promote transparency, and move the trading of OTC derivatives onto registered execution venues. In many respects, repo as a product had more of a direct impact on the stability of the global financial system than any single OTC derivative product. Despite this assertion, only a smattering of substantive reform is being directed specifically towards the repo market.

In this TABB Group report, Reforming REPO: Can Liquidity & Safety Co-Exist, TABB Group examines the current state of the repo market, as seen through the eyes of market participants, and assesses whether the risks present in the pre-Crisis era still preside or have been mitigated by the regulatory and organic efforts of the past ten years. In doing so, we look closely at the benchmark report issued by the NY Federal Reserve (The Risk of Fire Sales in the Tri-Party Repo Market, circa 2013) which examines the risk of “fire sales” in the tri-party repo market and assesses some of the consequences, drawing our own conclusions about whether the report should still be held up as the standard for the market.