Basic HTML Version
28
|
Opportunities and Challenges for Hedge Funds in the Coming Era of Optimization
the most rapid growth in the post-GFC era, rising from
$459 billion AUM at the end of 2007 to $743 billion by
Q2 2014—an increase of 62%.
While asset owners are thus likely to maintain parts
of their bond lending programs for the supply with
higher spreads, there are more and more of their
lendable government securities that have begun to sit
unutilized in intrinsic lending programs. Exchanging
these government bonds in repo transactions for
cash or using cash assets to reverse repo and build
their inventory of government securities is a function
that has traditionally been a part of most bundled
lending programs. Many asset owners are now
opting to insource this function as well—representing
the second major unbundling of securities lending
services post-GFC.
Insourcing Repo Provides Better Cash
Management Tools
Repo financing began as a cash management tool
focused primarily on government securities. In the
years leading up to the crisis, survey participants
noted that repo trading began to expand into less
liquid and asset-backed instruments.
Illiquidity in these instruments impacted the repo
markets dramatically during the crisis. Interviewees
noted that as the cost of financing skyrocketed,
haircuts on repo transactions ballooned and
lenders around the globe were forced to recall their
cash. As cash was withdrawn from the system, the
counterparties to those transactions were forced to
sell their assets at increasingly unfavorable levels.
This created a continuing downward cycle that
exacerbated market concerns in the crisis period.
Moreover, non-U.S. banks with U.S. affiliates caught
up in the liquidity crisis were forced to provide ever
increasing amounts of funding to help meet their
U.S. repo obligations and this helped transmit the
crisis globally.
In the years since the crisis, survey participants noted
that more and more, asset owners are beginning to
view repo once again as a cash management tool
that they can insource to support their internal
liquidity needs.
Chart 23 shows this shift in the service model.
Typically, it is those asset owners that are managing
their own cash reinvestments that are also taking in-
house their repo lending.
Source: Citi Business Advisory Services
Chart 23: Shifts in Securities Lending Service Model
Post-GFC: Changing Approach to Repo Financing
Pre-Crisis
Post-Crisis
Asset Owner
Asset Owner
Source of Service
Lender
Lender
Oversight of Service
Cash Reinvest
Repo
Stock Loan
Repo
Cash Reinvest
“ We are thinking about bringing in the fixed income
book from the agent and doing the lending
ourselves,” — Asset Owner—Money Manager
“ Some people in the building are not fans of repo
lending full stop because of how it fed the crisis.
My view is that you need to look at the purpose
of the financing. Is it for leverage? In that case,
you could argue that repo is not good, but a lot of
funds also use it as a tool for cash management,”
— Asset Owner—Money Manager
“ I would love to bring our cash management in
house. Right now our sweeps make essentially 0.
We also have our collateral fromsecurities lending—
so we have a decent amount of collateral that’s
posted to us, plus our own collateral, and then our
cash pool from posting our commodity derivatives
exposure. Right now, it’s not a pressing issues
because the opportunity is so low, but once the
Fed Funds rate moves it is something well have to
take a harder look at,” — Asset Owner—Institution