(FROM THE WALL STREET JOURNAL 4/8/15)
By Katy Burne
Investors and small firms are entering the $2.6 trillion U.S.
repo market, taking advantage of banks' retreat from a key corner
of the credit markets.
A handful of real-estate investment trusts and other borrowers
are getting these short-term repurchase loans from firms other than
banks, which have dominated the market.
Repos are short-term loans, often made overnight, that serve as
the lifeblood of Wall Street. In a typical repo, a money-market
fund lends cash to a hedge fund or other borrower in exchange for
bonds, with the borrower agreeing to repurchase the bonds later at
a slightly higher price. Banks traditionally facilitate the
transactions, earning a fee.
Lately, many big banks have retreated from the repo market
following the adoption of costly new regulations. That has prompted
many borrowers such as mortgage REITs, which borrow at low rates to
amplify returns on their investments, to use new brokers that
aren't affected by the new rules or to borrow without a broker.
On the lender side, Stephen Jones, who oversees about $4 billion
of state money at the Commonwealth of Kentucky, said he completed
his first direct repo trade in January, without using a large,
bank-owned broker-dealer. The state is lending $123 million this
month to a REIT called Invesco Mortgage Capital Inc., up from $50
million earlier.
The shift by REITs and others is driven in part by the retreat
of large banks. Outstanding repo loans at the largest U.S. banks
have declined by 28% over the past four years, according to
Barclays PLC. The bank predicts an additional 20% decline.
This opens up a potential new revenue opportunity for nonbank
brokers and others who aren't subject to the same regulations.
Byron Boston, chief executive of Dynex Capital, a REIT, has been
using a nonbank repo dealer called South Street Securities, which
focuses exclusively on repos, for $500 million of repos daily.
"Banks are picking and choosing their spots," he said.
The supplies of high-quality bonds securing most repos already
are severely constrained, snarling trading and amplifying price
swings in the market. Money-market funds and other lenders who need
access to the safest short-term securities are increasingly
offering incentives to get the bonds they need for their
portfolios.
"It's been pretty much a downward grind in terms of repo supply
overall," said Laurie Brignac, head of repo and government funds at
Invesco Ltd., overseeing $77.3 billion in money-market fund assets.
Her firm is separate from the Invesco REIT.
Ms. Brignac said she has been in discussions to use AVM LP, a
nonbank broker in Boca Raton, Fla., that seeks to connect buyers
and sellers in repos for a fee. The firm now brokers about $80
billion of repos daily, up from $60 billion a year ago, said Jeff
Kidwell, head of AVM's Direct Repo unit.
Deborah Cunningham, chief investment officer for global money
markets at Federated Investors Inc., overseeing $259 billion, said
she has been discussing new trading relationships with large
securities holders such as insurance companies but that she hasn't
yet completed any such trades.
To be sure, the share of nonbank dealers in repos and direct
transactions remains small relative to the size of the repo
market.
As of January, only $60 billion of repo or repo-like trades
globally were conducted directly between borrowers and lenders,
according to consultancy Finadium LLC.
Some participants said the new providers won't be able to fill
the void left behind by the major banks, because of participants'
hesitancy to use new providers.
"It won't be an even trade-off," said Rich Jablonski, executive
vice president of nonbank dealer Wedbush Securities, in Los
Angeles, which this month launched a repo desk in New York led by
former Newedge repo veteran Scott Skrym.
One repo desk that has been expanding is at Wells Fargo &
Co. On Monday, Mike Wieczorek joined the bank from U.S. Bancorp as
head of repo trading, said a spokeswoman.
The Federal Reserve in late 2013 launched an alternative repo
facility, but the central bank has placed limits on each
participant's usage, as well as a cap on overall usage at any one
time.
Wall Street firms have been backing discussions for an expansion
in clearing services for repos, which could offer some relief to
big banks with balance-sheet pressures by allowing them to net, or
cancel out, a large amount of offsetting repos. But those services
haven't yet materialized.
Peter Yi, who oversees $235 billion at Northern Trust Asset
Management, said he had been approached by some REITs seeking to
borrow, but he said striking new partnerships is challenging
because many firms aren't public and thus not as transparent.
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