March 1, 2012 / 7:51 PM / 5 years ago

TEXT-Fitch: NY Fed data provide different perspectives on repo market

 (The following statement was released by the rating agency)	
 March 1 - A recent Fitch report about prime money market funds' use of
triparty repos showed a significant post-crisis increase in transactions backed
by structured finance collateral, reaching levels last observed in late 2007. 
But Federal Reserve Bank of New York (FRBNY) data provides other perspectives.
We thought it helpful to clarify the differences. 	
The FRBNY data is best summarised in a recent blog by Antoine Martin, which used	
the Tri-Party Repo Infrastructure Reform Task Force data to conclude that there 	
is no evidence of a broad-based increase in riskier types of collateral in the 	
triparty repo market since mid-2010.  	
Fitch's study focuses on prime money funds, which play a prominent role as 	
triparty repo lenders against both government securities and riskier 	
"non-traditional" collateral such as corporate debt, equities, and structured 	
finance securities.  Money fund disclosures provide the most detailed publicly 	
available historical information on repo haircuts, pricing, collateral, and 	
counterparties.  These disclosures enabled Fitch to construct a time series of 	
repo attributes back to end-2006, capturing trends before, during, and after the	
US credit crisis.  	
While the FRBNY data provides an excellent high-level overview, our study uses 	
the SEC's recently developed Form N-MFP for in-depth  insight on security-level 	
details of repo collateral.  These new forms enabled us to determine that at 	
end-August 2011 about 50% of the structured finance collateral pool consisted of	
legacy subprime and Alt-A RMBS and CDOs, and to identify the top issuers of 	
these securities (eg, Countrywide). The money fund data shows that much of the 	
collateral is deeply discounted, with a median value of roughly 43 cents on the 	
dollar.  From a systemic risk perspective, these transactions involve relatively	
less liquid, longer-tenor securities financed short term by highly risk-averse 	
cash investors such as money funds.	
Although money fund disclosures (particularly Form N-MFP) provide the most 	
in-depth view of repo terms and attributes, the FRBNY publishes the most 	
comprehensive information on the triparty repo market, including collateral mix 	
and haircuts.  Another benefit of the FRBNY data is its timeliness and 	
frequency, with monthly updates from May 2010.  The FRBNY dataset is therefore 	
the best source for evaluating high-level trends in haircuts and collateral 	
across the triparty market.  Median haircut statistics are comparable with our 	
study for the periods of overlap (eg, end-August 2011); however, our estimates 	
of the share of riskier collateral will necessarily exceed the FRBNY's, as our 	
study excludes money funds that transact exclusively in government securities.  	
Our sample of over USD90bn repo transactions captures 5% of the USD1.6trn 	
triparty market, or 15% of the "riskier" collateral.	
The FRBNY dataset reveals that structured finance repo haircuts increased after 	
Fitch's end-August observation period. These haircuts could indicate greater 	
conservatism among repo lenders or reflect a decline in the overall credit 	
quality of this collateral. It is difficult to determine because the FRBNY data 	
for ABS and private label CMO combined both investment and non-investment grade 	
securities into single categories from mid-2011.  Either way, the greater 	
transparency afforded by both the FRBNY and SEC disclosures enhances the 	
market's understanding of risk trends in this critical funding market.	
Financial market trends and banking regulations could encourage use of repos to 	
fund structured finance securities.  Recent structured finance market activity 	
points to increased investor appetite for legacy securities (eg, the FRBNY's 	
completed sale of the Maiden Lane II portfolio of RMBS).  This appetite comes 	
partly from hedge funds, some of which finance investments through bilateral 	
repos with prime brokers that may then refinance these securities in the 	
triparty market.  Money market funds, operating in a historically low-yield 	
environment, are able to generate higher income on repos backed by structured 	
finance collateral than on those backed by US government securities.  Stricter 	
banking regulations also create incentives for some riskier assets to be 	
financed through the "shadow" banking system, including both the triparty and 	
the larger bilateral repo markets.  For example, Basel applies a 	
dollar-for-dollar capital charge on securitisation exposures rated 'B+' and 	
Additional information is available on	
The above article originally appeared as a post on the Fitch Wire credit market 	
commentary page. The original article can be accessed at 	
All opinions expressed are those of Fitch Ratings.	
Applicable Criteria and Related Research: 	
Repo Emerges from the "Shadow"	
 (New York Ratings Team)	

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