A new paper on the wholesale funding markets argues that market participants must recalibrate business and operational models if they are to accommodate and benefit from fundamental changes within those markets.
The paper – The Future of Wholesale Funding Markets: A Focus on Repo Markets Post US Tri-Party Reform – is published by BNY Mellon in conjunction with PwC Financial Services. It concludes that, while regulation and ongoing reform will continue to shape wholesale funding, strong market forces combined with the underlying structure and profitability of the business are set to impact repo volumes, participant interactions, and views of risks in the system.
The paper notes that 75 percent of surveyed participants agree that the wholesale funding markets are less vulnerable to a future crisis following the tri-party reform initiative, which reduced the need for secured intra-day credit provided by the clearing banks and also improved trading transparency and decreased operational risk through process improvements, such as automated three-way deal matching.
The paper highlights three key future drivers that will shape the US market:
Pending regulations on repo users will likely dampen repo volumes in the near term, most directly through the allocation of capital and liquidity ratios to the desk level.
The increased demand for high quality liquid assets, and a potential further increase brought about by Money Market Reform, indicate that the Fed will likely maintain its Reverse Repurchase facility for the foreseeable future.
Expanding cleared repo services in the US is now considered an imperative, given the need to address ‘fire sale’ risk and the search by Global Systemically Important Banks (G-SIBs) for balance sheet relief.
The paper notes that each of these developments raises multiple considerations for market participants, but that the incentives in addressing these considerations vary greatly across collateral providers, cash investors, matched books, inter-dealer brokers, and regulators.