Thread by @wmiddelkoop

Thread

Very few understand the US 'repo-market' and how it is used to support U$ treasuries.

This Bloomberg article - 'Can the Fed Fix the Treasury Market by Tweaking Repo?' - is the best I have come across so far, let me quote:

(please add comments to help people understand)

washingtonpost.com/enterprise/can…

..bouts of Treasuries turmoil have been happening more frequently and at times triggering large-scale interventions from the U.S. Federal Reserve. Pandemic-sparked volatility in March 2020 caused liquidity in the world’s biggest bond market to plunge

.. pushing the Fed to pour in more than $100 billion a day through debt purchases. More than a year later, the Fed announced the creation of what’s known as a standing repo facility, a step meant to head off future turmoil.

A few hours earlier, a panel of former top global policy makers had called for the creation of such a facility, along with other measures to shore up the Treasuries market.

WP about the importance of the repomarket for U$ treasuries during the 2019 September panic:

.. the September 2019 blowup in the “repo” (repurchase agreement) market, which provides the funding for many Treasuries trades ..

WP about the problems because of the huge size of the U$ treasury market nowadays:

.. And Federal Reserve Vice Chair for Supervision Randal Quarles in 2020 warned that the sheer size of the Treasury market itself was hampering dealers’ market-making capacity.

What did the Fed do?

At its July 2021 Federal Open Market Committee meeting, it said it would create a standing repo facility (SRF) When people say Treasuries are highly liquid, the proof is in the repo market, where banks and other big investors swap Treasuries for cash ..

Repo makes the wheels of finance turn a little more easily -- except when it doesn’t. In September 2019, the Fed had to flood the repo market with hundreds of billions after interest rates spiked in a sign of distress.

Afterward, Fed officials postulated the idea of setting up a SRF that would give the Fed a permanent presence in the market, allowing eligible counterparties to convert certain debt securities into cash daily, as an ever-ready backstop...

G30, an independent global council of economic and financial leaders, published an array of recommendation for ensuring the soundness of the Treasury market. Former U.S. Treasury Secretary Tim Geithner, who heads the G30’s Working Group on Treasury Market Liquidity, ..

.. included the SRF as its top recommendation. The G30 report attributed the “root cause” of recent Treasuries disruptions to a surge in federal U.S. debt accompanied by a tighter regulatory regime for bank capital in the aftermath of the 2007-09 financial crisis.

It’s not only the G30 -- former president of the New York Fed Bill Dudley wrote in a Bloomberg Opinion column on July 29 that while the SRF is a big step forward, much more needs to be done to guarantee its smooth functioning. Here are some key ideas that experts have put forward

To prevent another flareup, Fed officials have raised the possibility of fortifying the market’s foundation with a broad-based central counterparty (CCP) clearinghouse to back up trades and handle surges in activity in times of stress..

A CCP that handles many if not all Treasuries trades, supported by capital supplied by its members, could limit the need for Fed interventions. ..

As with a standing repo facility, the idea is to create alternative ways for traders to find counterparties for the times when the Wall Street dealers who normally handle large volumes are hunkered down. Enhancing the ability of investors to trade more directly with each other..

..is seen by some as a way to reduce dependence on the Fed’s primary dealers, a group of 24 that is dominated by big banks such as JPMorgan Chase & Co. and Bank of America Corp. One idea floated is to allow investment managers into the primary dealer fold.

End . all quotes from the great Liz Capo McCormick article on Bloomeberg

also see federalreserve.gov/newsevents/pre…