Re: The Repo Market Time Bomb

[stan jonas <joco@xxxxxxxxxxxxx>]

Henry:

Sorry..

but i reread my response to you and I think that in a short piece I did a better
job than your Fed.. expert...

In his piece he uses the term " general  repo rate prevailing"  as opposed to the
special rate for a specific security.

The "general repo" rate.. as he says is the G/C
rate.. the rate for general collateral.. a more descriptive term as it denotes the
key point  that it is the bond that you borrow that determines the repo rate.. any
thing but G/C is
"special".

His chart 1 makes this point..

But all in all this is an excellent introduction to the Repo marketplace and its
function at least till 1996.. things have changed a bit since then..
in as much as the Government is rapidly paying down the debt and has caused a
shortage of collateral with which to do REPO..t his crop shortage.. has made the
implementation of policy more diffcult and has dramatically effected the efficiency
of the marketplace.



"Henry C.K. Liu" wrote:

> Stan Jonas declared that "a good assumption is that G/C .. (..if you don't know
> what this is, you shouldn't talk about repo to begin with) trades about 5 basis
> points beneath the effective Fed Funds rate.
>
> I requested a clarification on what G/C stands for which Jonas did not to fit
> to response so far.
>
> I then check with the NY Fed and was pointed to the following paper by Frank
> Keane of the NYFRB which never mention the term G/C.  I guess the NYFRB should
> be talking about repos!
>
> Repo Rate Patterns for New Treasury Notes
> By Frank Keane - a financial specialist in the Capital Markets Function of the
> Research and Market Analysis Group.
> - NY Federal Reserve Bank
>
> Despite the enormous popularity of the market for repurchase agreements, the
> behavior of interest rates on ?repo? transactions is not well understood. An
> analysis of new data for
> 1992-95 reveals that repo rates on recently issued Treasury notes rise and fall
> in a regular pattern as the Treasury auction cycle progresses.
> In the past several years, the market for repurchase
> agreements?the ?repo market??has grown rapidly,
> achieving a daily trading volume in excess of $500 billion. ($2.5 trillion in
> 1998 - HCKL)
> Securities dealers, corporate underwriters, money managers, and others
> routinely use the market as a temporary funding mechanism. Spurred by the need
> to finance inventories or fulfill commitments to cus-tomers, these institutions
> enter the market to borrow
> money or securities for return at a later date.
> Despite the repo market?s size and popularity, information about basic market
> characteristics is surprisingly limited. This edition of Current Issues sheds
> light on an important segment of the market, the borrowing of newly issued
> Treasury securities. Using new data for the 1992-95 period, we track the
> interest rate on these transactions ?the ?repo rate?? and evaluate the
> associated costs. To the casual observer, repo rate movements may appear
> irregular and transaction costs high. We demonstrate, however, that repo rates
> follow a predictable pattern based on Treasury auction cycles and that costs
> are in fact modest.
>
> Understanding Repo Transactions
> Repurchase agreements are essentially collateralized loans: when the object of
> the transaction is to borrow money, securities are posted as collateral; when
> the object is to borrow securities, the collateral is cash. In both cases, the
> instrument borrowed is returned to the
> original holder when the loan matures. Although these loans can be of any
> maturity, the great majority mature after one day, and transaction length
> rarely exceeds ninety days.1
> The price of a repo transaction is always expressed as an interest rate.
> Dealers 2 that enter the market to borrow money against securities will pay the
> ?general repo rate??an interest rate tied to general market interest rates. For
> dealers that enter the market to borrow securities, however, the price of the
> transaction is more
> complicated. As the providers of funds (they post cash as collateral to obtain
> securities), these dealers receive an interest rate. If this rate drops below
> the general repo rate prevailing over the term of the loan, it is said to be
> ?special.? Repo rates become special when dealers need specific securities to
> cover ?short sales? and consequently accept a lower return on their funds to
> obtain them.3  For dealers in this position, receiving a special repo rate on
> their funds is equivalent to paying the spread between that rate and
> the general repo rate.
>
> September 1996 Volume 2 Number 10
> http://www.ny.frb.org/rmaghome/curr_iss/ci2-10.html
>
> I also check NYFRB Fedpoint 4:
>                  Repurchase and Matched-Sale Transactions
>
> Again no mention of the term G/C.
>
> http://www.ny.frb.org/pihome/fedpoint/fed04.html
>
> I even check the glossary: repo
>
> http://www.contingencyanalysis.com/glossaryrepo.htm
>
> Again no entrant of the term G/C.
>
> Stan Jonas will do the list a favor if he will provide a definition of G/C.
>
> Henry C.K. Liu
>
> "Henry C.K. Liu" wrote:
>
> > stan jonas wrote:
> >
> > >
> > > Simple supply and demand pressures will move the two rates to either side
> > > of a clearly defined arbitrage band.. but a good assumption is that G/C
> > > .. (..if you don't know what this is, you shouldn't talk about repo to
> > > begin with).trades
> > > about 5 basis points beneath the effective Fed Funds rate.
> >
> > I don't know what G/C (government/commercial?) is and I started this thread
> > on repos.  I personally do not trade, although I think I know a bit about
> > repos. I employ traders.
> > But the purpose of participating on a list is to exchange ideas and
> > information rather than showing off with one-upmanship.  One hopes to learn
> > as well as to sharpen one's thoughts through being challenged and by
> > challenging the ideas of others.
> > It would be more useful if you would identified what "G/C" stands for,
> > instead of merely using it to buttress your credibility.
> > I recently asked a top expert on structured finance what a NIMS is and he
> > did not konw, and it does not lower my respect for him.  (They are "net
> > interest margin securities".)
> >
> > Henry C.K. Liu