U.S. Bilateral Repos Amount to $1.8 Trillion Treasury's OFR Says

There’s about $2 trillion of U.S. bilateral repurchase agreements outstanding, the Treasury Department’s Office of Financial Research said Wednesday in its first assessment of the industry’s size.

The deals, which typically last one day, mainly use Treasuries for collateral, the OFR wrote in a report. Reverse repo agreements amount to about $3 trillion. The survey used snapshots of data provided voluntarily last year by U.S. securities dealers affiliates of nine bank holding companies.

Regulators are trying to increase transparency in the repo markets to reduce the risk that the key funding sectors will contribute to another financial crisis. The Federal Reserve has taken steps to shore up the tri-party repo business, which neared collapse in 2008 amid the demise of Bear Stearns Cos. and the bankruptcy of Lehman Brothers Holdings Inc. The OFR and the Fed in 2014 started a project to collect data to improve understanding of the bilateral repo and securities lending market.

In a repo, dealers sell securities to a counterparty in exchange for cash, with the debt serving as collateral for the loan. The exchange includes a promise to buy the security back at a later date. In a reverse repo, the dealer takes in securities and provides cash.

Deal Difference

In the bilateral market, the deal is completed without a middleman to clear the transaction. In a tri-party arrangement, a third party, such as a bank, clears the deal, functions as the agent for the transaction and holds the security as collateral.

“Repurchase agreements are mostly used for U.S. Treasuries and agency securities,” according to the report. “We found that securities lending contracts are used almost exclusively when dealers exchange equities for cash and are heavily relied on when dealing with corporate securities.”

The OFR, created to help prevent financial crises, conducts studies for U.S. regulators and the Financial Stability Oversight Council. It has focused on discovering and helping reduce gaps in analytical work by financial regulators, zoning in on unregulated or lightly regulated markets.

The Federal Reserve Bank of New York has monthly tri-party repo transactions data back through May 2010 on its website. More than $2.8 trillion in securities were being financed on average daily during the market peak in 2008 through tri-party transactions, many of which had short-term maturities. As of December, the value of securities financed fell to $1.6 trillion, according to New York Fed data.

While the data provides more insight into the bilateral market, the OFR noted challenges in collecting the information. They raised issues such as the limited scope of the data they received and its lack of standardized format, given that it was provided voluntarily. 

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