As a result of regulation affecting capital charges of short-term financing, financial institutions are increasingly turning towards long-term funding and using equities for collateral, according to Markit.
Over 70% of delegates polled at Markit’s securities lending forum in March said that over the next two years they expect the financial industry will make increased use of lower quality collateral such as equitites and sub investment grade bonds. Markit also determined through data from BNY Mellon Broker Dealer Services that that while the repo industry has grown by 1.6% in the six months leading up to March 12, 2014, the value of long-term trades have been growing at a faster rate than short-term trades.
Specifically, repo trades with a duration up to one month have grown at 1.65%, while trades with a duration of 1-2 months and 2-3 months have grown at 13.7% and 11.3% respectively, although volumes of long-term trades are still significantly less than short-term ones.
Furthermore, equities have increasingly been used to collateralize these deals, growing at 19.8%, in comparison to the 1.6% overall rate of repo growth. As a result, equity repo trades have increased their market share by 14 basis points to make up 9.3% of the tri-party repo market.
Most of these equity repo deals were for trades with longer than one month duration, with a growth of 46.7% for 1-2 month terms, compared to 10.2% for terms up to one month.
Long-Term Equity Repo Is on the Rise, Finds Markit
As a result of regulation affecting capital charges of short-term financing, financial institutions are increasingly turning towards long-term funding and using equities for collateral, according to Markit.