This Chart Shows the Incredible Rise in Extendable Repos
Behold, the scramble to meet new rules concerning bank funding, in chart-form.
The above, from Markit, shows the stark increase in a type of repurchase agreement known as an 'extendable' or 'evergreen' repos. It encapsulates U.S. dollar triparty funding from Bank of New York Mellon, one of two triparty banks, and covers more than 50 percent of the overall market.
Like a normal repo agreement, extendable repos provide banks with a form of secured funding. The crucial difference here is that extendable repos can be continuously renewed by mutual agreement between the bank and its counterparty, and typically come with longer than normal notice periods for ending the deal. In the face of new financial regulation such as the liquidity coverage ratio (LCR), which came into effect at the start of this year and requires banks to hold enough high-quality liquid assets to cover predicted cash outflows over a 30-day period, these evergreen deals have enjoyed a stunning surge in popularity.
"We see a very significant and sharp sustained increase beginning just before the end of March this year," said Steven Baker, director of securities finance at Markit. "Clearly there’s been a very strong increase as there were very low volumes right up until then.”
Long-time watchers of bank funding esotericism may remember some noises about extendable repos from the Bank of England back in 2010, when they were labelled as "innovations"* in money market instruments alongside putable certificates of deposit. Here the concern has been that such evergreen deals may fail to be renewed in times of market stress, thus negating their ability to cushion banks' from widespread turmoil. (Others have raised the point that banks' creaking risk management and technological systems may not be up to the task of keeping track of the deals).
With certainty, however, these extendable repo deals help banks meet the 30-day requirement under the LCR, and it's no surprise that the vast majority come with at least a 30-day notice period.
"These are definitely durable term funding, it’s just a matter of will they continue to be able to roll these," said Markit's Baker. "They’re secured for the time of their notice period. Therefore, as LCR requires banks to satisfy liquidity needs for more than 30 days, having a notice period in excess of 31 days translates to securely having that money for 31 days. So even if they’ve received notice to close, they still have that time to find alternative funding.”
*The word 'innovation' is rarely a compliment when it comes to bank funding regulation.