Repo market: Coincidence or what?
I’ve recently had my anorak on and I’ve been looking at the euro repo market. And it strikes me as a bit of a coincidence that none of Lehman Brothers, Bear Stearns, Northern Rock and HBOS was a member of Eurex Repo.
Why is this relevant?
Well, it has become clear over the past year that access to central bank liquidity is absolutely vital. All four of these institutions have found out to their cost that they could not rely on their counterparties for funding, even if it was in return for collateral of some sort of other. A recent study by BearingPoint (An analysis of the secured money market in the Eurozone – 4th Extended Edition) states that the repo market has not operated over the past year the way many had expected, even though the central banks have pumped in liquidity.
“Before the sub-prime crises, market experts anticipated that during a shortage of liquidity, trading volume would shift from the unsecured to the secured money market instruments such as repo. However, our interviewees confirmed that market liquidity in the repo market did not increase,” writes BearingPoint.
The exception has been Eurex Repo’s GC Pooling segment, which trades a basket of ECB-eligible collateral. As BearingPoint says: “The ECB open market operation was one of the most important sources of liquidity at the beginning of the crisis, especially for institutions which were cash-short.” It still is.
The ECB’s tender auction is not operated directly through Euro GC Pooling, but it does make it easier to access this important source of liquidity. Of course, it could be argued that HBOS and Northern Rock needed sterling, while Bear Stearns and Lehman needed dollars. But their inability to have adapted to the new funding and liquidity paradigm looks like poor business management.