A recent Fitch Ratings analysis of Federal Reserve Bank of New York data has revealed that almost $300 billion in non-governmental securities is typically financed through the U.S. tri-party repo market, consisting of about $109 billion in equities, $68 billion in corporate bonds, $76 billion in structured finance and $44 billion in collateralized debt obligations, municipals, whole loans and other securities.
Treasury and agency securities make up the balance of the $1.79 trillion U.S. tri-party market, Fitch says. The size of the more-opaque bilateral repo market is difficult to calculate and therefore unclear.
The study comes as government officials raise warnings about the potential systemic risks of funding less-liquid assets through short-term wholesale funding markets, including tri-party repo.
The $76 billion in structured finance in the tri-party repo market represents ten times the amount of average daily trading volumes of that particular asset class, according to Fitch data. Structured finance repo collateral often consists of deeply discounted, small-sized legacy securities, including subprime and Alt-A RMBS and CDOs, which can be difficult to fund or liquidate in periods of market distress, the agency points out.
The reason for the prevalence of structured finance in tri-party repo, Fitch suggests, is attractive yields: Repos backed by structured finance securities typically yield 63 basis points (bps) per annum, contrasted with the 17 bps typically seen for Treasurys.
Officials from the Federal Reserve, as well as a recent report from the Financial Stability Oversight Council, have pointed out concerns about funding longer-tenor assets through the short-term wholesale funding markets, specifically tri-party repo.
"The use of repo to fund less-liquid assets creates potential risks for both tri-party repo borrowers (i.e., dealer banks) and the underlying asset class," Fitch says.