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Strategies & Market Trends : Currencies and the Global Capital Markets -- Ignore unavailable to you. Want to Upgrade?

To: Henry Volquardsen who wrote (2337)	1/4/2000 6:01:00 AM
From: N	Read Replies (1) \| Respond to of 3536

Hi Henry! I found a great report on bis.org "Implications of Repo Markets for Central Banks". The section describing financial sector participation may interest the thread [my summary is below]. Questions: 1. Who are the major players among the repo intermedaries? 2. Same for banks and other financial institutions, if you've the time/inclination Wishing you a terrific last year of the millenium! - - - - - BIS. Implications of repo markets for central banks Parties to trade: participants in repo markets: banks, central banks, repo intermediaries participants active in uncollateralised money and interbank markets Risk: credit: volatility in value of collateral liquidity: forced liquidation of collateral at discount in event of counter party default offsetting effects on systemic risk: 1. more resilient to shocks than uncollateralised markets 2. withdraws securities from pool of assets available to unsecured creditors in event of bankruptcy 3. close link to financial markets transmits shocks 4. increased systemic risk through leverage Transactions with repos: securities exchanged for cash with future agreement to repurchase securities as collateral for cash loan cash as collateral for securities loan collateral: sovereign debt, private sector debt (commercial paper, mortgage backed securities), equity standard repurchase agreements, sell/buybacks, securities lending maturities: overnight, open, term financial sector: obtain securities to meet contractual obligations, make delivery for a futures contract fund long positions in securities fund short positions for hedging interest rate risk Types of transactions central banks: liquidity management: supply (repos), absorption (reverse repos) signalling of interest rates financial sector: 1: -- borrow cash, a. to obtain funds b. for leverage and to take long positions a. use repurchase agreements to obtain funds, like a collateralised loan i) borrower of cash gets lower financing cost relative to uncollateralised market ii) lender of cash gets collateral which limits credit risk b. use leverage to fund ‘long' positions in securities: use cash from original repo to buy securities, use securities as collateral to buy more securities 2. – borrow securities with cash as collateral a. borrow securities with cash b. borrow securities to acquire specific securities with specific repo transactions e.g.: i) make delivery on futures contracts ii) cover a short position in securities to hedge interest rate risk borrow security, i.e. sell short a security from another party in the repo market; use cash from sale of security as collateral 3. matched book trading by repo market intermediaries arbitrage actions, market making and speculation a. arbitrage direct trading of the repo rate itself by borrowing securities or cash through repo markets with intention of relending the cash or securities at more favorable rates in the same market b. speculation: taking a position based on a forecast of the direction of rates, a position on ‘the shape of the repo curve' by mismatching the maturity of repos and reverse repos (borrow (lend) at term, lend (borrow) overnight