triparty repo

One reason that it’s silly to get worked up about banks gambling with your deposits is that they’re mostly not. Your deposits have a tendency to be structurally senior, insured, at regulated subs, etc.; nothing all that bad will happen to them. Banks are gambling with your money market funds, and with the securities-lending proceeds from your mutual funds. Which are not insured, or particularly regulated, but which fund something like $1.9 trillion of securities dealers’ inventory through tri-party repo, as well as providing some $6 trillionish in other collateralized funding for dealer and hedge fund inventories. And this is really much worse, crisis-wise. Since deposits are insured, runs on them are rare. Runs on repo probably caused the financial crisis. Maybe.

NY Fed President William Dudley gave a pretty good speech about this stuff today; you should read it, or read some summaries here or here. The most fun parts for me had to do with the tri-party repo market.

First of all, if you’re following that market you may be aware that the Fed is moving to get rid of “the unwind,” in which

  • by day, cash investors deposit their cash at JPMorgan and BoNY and JPM/BoNY lend cash to securities dealers, but
  • by night, those cash investors lend the cash directly to the dealers in the freaky unregulated shadow banking market.

Those two activities sort of live on a continuum – traditional(ish) banking by day, shadow banking by night, but still the same provision of credit to the same people based on the same collateral. It’s just that during the day the cash investors’ risk is wrapped in the gentle embrace of the clearing bank; at night the cash investor snuggles up directly with the collateral. Dudley argues that this combined the risks of shadow banking with the complacency of regular banking: Read more »

  • 02 Aug 2012 at 1:13 PM
  • Banks

Shadow Banking Is Just Like Regular Banking, Only Darker

It feels virtuous every so often to take glance over at the triparty repo market. You get a nice dose of horrified vertigo and then go back to your life and don’t think about it for a while and that always feels better. Now is a good time to get back to it, what with continued worrying about money-market funds – a core player in the market – and two interesting things this week about triparty repo: this testimony from Matthew Eichner of the Fed to a Senate subcommittee, and this report from Fitch.

Here is how I imagine triparty repo:

  • A bunch of money market funds and other cash investors keep $1.8 billion of cash at JPMorgan and Bank of New York Mellon, the “clearing banks” in the triparty system.
  • A bunch of securities dealers keep a pile of securities – worth, on a good day, more than $1.8bn – to JPM and BoNY Mellon.
  • The dealers need money to fund those securities, because what are they going to do, pay for them themselves?
  • Every afternoon, the cash investors and the securities dealers frantically negotiate which dealers swap their securities (at negotiated haircuts) for which cash investors’ cash.
  • Every night, the cash sleeps in the (notional) arms of the securities dealers, while the securities (and a promise to buy them back in the morning) sleep in the (notional) arms of the cash investors.
  • Every morning, the cash wakes up and springs from the dealers’ beds back into the waiting arms of the cash investors, and vice versa etc.
  • Which means that the dealers need to borrow cash to be able to give it back to the investors. Where do they get the money?
  • Well, from JPMorgan or BoNY.
  • Where do JPM and BoNY get the money?
  • Well, from deposits.
  • Whose deposits?
  • Well, the deposits of the cash investors.

More or less, right? Read more »