Search Results
Working Paper
Bond Market Intermediation and the Role of Repo
This paper models the important role that repurchase agreements (repos) play in bond market intermediation. Not only do repos allow dealers to finance their activities, but they also increase dealers' ability to satisfy levered client demands without having to adjust their holdings of risky assets. In effect, the ability to borrow specific assets for delivery allows dealers to source large quantity of assets without taking ownership of them. Larger levered client orders imply larger asset borrowing demands, thus increasing the borrowing cost for the asset (i.e., repo specialness). Dealers ...
Discussion Paper
Non-bank financial institutions and the slope of the yield curve
In this note, we examine how changes in the yield curve slope affect the provision of credit and intermediation services by non-bank financial institutions (NBFIs), including broker-dealers and hedge funds. Although these NBFIs typically do not lend directly to the non-financial sector, they indirectly support the flow of credit by investing in debt securities and extending financing to investors who own such securities.
Working Paper
Private Money Creation with Safe Assets and Term Premia
It has been documented that an increase in the demand for safe assets induces the private sector to create more money-like claims. Focusing on private repos backed by U.S. Treasury securities, I show that an increase in the demand for safe assets leads to a decreases in the issuance of Treasury repos. The intuition is that Treasury securities already function as a safe asset, thus in terms of safe asset creation, private Treasury repos are neutral. In the model, Treasury repos are beneficial because they shift risk (i.e. term premia) from relatively risk averse households to a more risk ...
Working Paper
Balance-Sheet Netting in U.S. Treasury Markets and Central Clearing
In this paper, we provide a comprehensive investigation of the potential for expanded central clearing to reduce the costs of the supplementary leverage ratio (SLR) on Treasury market intermediation in both cash and repo markets. Combining a detailed analysis of the rules involved in calculating the SLR with a unique set of regulatory data, we conclude that expanding central clearing would have relatively limited effects on the level of SLRs. We do find intermediaries’ increase their balance sheet netting when their regulatory balance sheet costs are higher. Our data permits us to ...
Discussion Paper
What Makes a Safe Asset Safe?
Over the last decade, the concept of “safe assets” has received increasing attention, from regulators and private market participants, as well as researchers. This attention has led to the uncovering of some important details and nuances of what makes an asset “safe” and why it matters. In this blog post, we provide a review of the different aspects of safe assets, discuss possible reasons why they may be beneficial for investors, and give concrete examples of what these assets are in practice.
Working Paper
Liquidity Windfalls: The Consequences of Repo Rehypothecation
This paper presents a model of repo rehypothecation in which dealers intermediate funds and collateral between cash lenders (e.g., money market funds) and prime brokerage clients (e.g., hedge funds). Dealers take advantage of their position as intermediaries, setting different repo terms with each counterparty. In particular, the difference in haircuts represents a positive cash balance for the dealer that can be an important source of liquidity. The model shows that dealers with higher default risk are more exposed to runs by collateral providers than to runs by cash lenders, who are ...
Working Paper
What Drives U.S. Treasury Re-use?
We study what drives the re-use of U.S. Treasury securities in the financial system. Using confidential supervisory data, we estimate the degree of collateral re-use at the dealer level through their collateral multiplier : the ratio between a dealer's total secured funding and their outright holdings financed through secured funding. We find that Treasury re-use increases as the supply of available securities decreases, especially when supply declines due to Federal Reserve asset purchases. We also find that non-U.S. dealers' re-use increases when profits from intermediating cash are high, ...