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Breaking News: In the week of September 16 of 2019 there was a huge problem in the repo market. On Sept 16 and 17. lenders disappeared from the market, leaving many who wanted short term funding without takers; this created a huge spike in the overnight and term rates (rates spiked to 10%, when Fedfund Federal Reserves target rates are 2.0 to 2.25). The commotion was quelled only when the NY FED stepped in providing liquidity in the market. Speculation abounds as to the root cause. The main effect was that there was more demand for cash than there was supply.
- Corporation tax day Sept 15 resulted in cash drain from money market funds
- Fed QE balance sheet is being reduced
- High quantity of Treasuries hit the market at this point in the funding cycle ($54 Billion)- raising demand for cash
- High LCR (Liquidity Coverage Ratio) requirement from big banks (JPM, Citi, Wells, BOA) hold 300+ billion dollars in cash (total held at Fed is $1.3 Trillion). This drains cash from short term lending market, especially since these big banks are dealers and market makers.
- Antidotes include a standing repo facility by the Fed, reduce target rates, be more nimble as Fed was caught flat-footed as developments in the early morning market left them scrambling.
- What role would DLT play in this? There are at least a couple of PoCs for Repos a. Broadridge b.<insert>