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Working Paper
Risk-averse Dealers in a Risk-free Market - The Role of Trading Desk Risk Limits
Self-imposed risk limits effectively limit dealers' appetite for risks and their capacity to intermediate in Treasury markets in times of market stress. Using granular and high frequency regulatory data on US dealers' Treasury securities trading desk positions and desk-level Value-at-Risk limits, we show that dealers are more inclined to reduce their positions as they get closer to their internal risk limit, consistent with such limit being meaningful and costly for traders to breach. Dealers actively manage their inventories away from their limits by selling longer-term securities and ...
Working Paper
Fed Repo Operations and Dealer Intermediation
We examine how primary dealers utilized repo operations conducted by the Federal Reserve from September 2019 until May 2020 and how usage affected dealer borrowing and lending. Using daily dealer-level supervisory data, we find that during normal market conditions, dealers primarily used Fed repo to expand their total repo borrowing and on-lent much of this funding to a broad variety of counterparties. However, during market stress in March 2020, dealers used Fed repo as a substitute for funding from other counterparties and focused their on-lending to affiliated counterparties. Moreover, ...
Working Paper
Tradability of Output, Business Cycles, and Asset Prices
I examine the effect of a firm's tradability, the proportion of output that is exported abroad, on its stock returns. There are three novel empirical findings: (1) firms with higher tradability have more cyclical asset returns; (2) firms with higher tradability have more cyclical earnings growth; (3) returns of a portfolio long on firms with the highest tradability and short on firms with the lowest tradability can predict the real exchange rate. The empirical patterns are consistent with the relative price adjustment of tradable and non-tradable goods to business cycles driven by endowment ...
Discussion Paper
Treasury Issuance and Dealer Balance Sheets
Primary dealers play an important role as intermediaries in Treasury securities and repo markets, and demand for their intermediation rises on issuance dates. Recent increases in Treasury issuance have raised questions about dealers' capacity to meet this increased demand.
Discussion Paper
Taxonomy of Studies on Interconnectedness
This note provides a taxonomy of existing studies in the literature on interconnectedness, focusing specifically on empirical measures.
Discussion Paper
Use of the Federal Reserve's repo operations and changes in dealer balance sheets
Before the 2008 financial crisis, the Federal Reserve (Fed) regularly conducted repurchase agreements (repos) in a fairly modest size with primary dealers to adjust the supply of reserves in the banking system and to keep the federal funds rate at the target set by the FOMC. During the economic downturn that followed the financial crisis, the Fed engaged in large scale asset purchases in order to provide additional monetary accommodation, and those purchases significantly increased the supply of reserves and eliminated the need for the Fed to engage in repo operations to increase reserves in ...
Discussion Paper
Insights from revised Form FR2004 into primary dealer securities financing and MBS activity
The Primary Government Securities Dealers Reports (Form FR 2004) collect information at a weekly frequency on daily positions, cumulative transactions, financing, and fails of primary dealers in U.S. government and other fixed-income securities. The reports have been revised as of January 5, 2022 to increase the granularity of reporting.
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.
Discussion Paper
Dealers' Treasury Market Intermediation and the Supplementary Leverage Ratio
Treasury market intermediation by dealers, including Treasury securities market making and financing, requires regulatory capital. In particular, the six largest U.S. Treasury securities dealers are subsidiaries of large U.S. bank holding companies (BHCs), which are required to maintain a supplementary leverage ratio (SLR) of at least 5 percent at the BHC level.
Discussion Paper
Assessment of Dealer Capacity to Intermediate in Treasury and Agency MBS Markets
We provide an assessment of broker-dealers’ current and future capacity to support the smooth functioning of the Treasury and agency MBS markets, considering increases in Treasury issuance and continued Federal Reserve balance sheet normalization. Drawing on regulatory data analysis, recent research, and experiences with fixed income market functioning, we focus on two types of constraints that are most relevant for dealers’ intermediation activities: regulatory constraints—specifically the minimum Supplementary Leverage Ratio (SLR) requirement at the Bank Holding Company (BHC) ...