World finance :: Money, Savings and Stock markets

Money markets tri party repo risk stirs debate


* Role of high-risk collateral discussed * More transparency viewed as desirable By Ellen Freilich NEW YORK, March 7Risk in a market that is a key funding source for large securities dealers has recently prompted some debate after a study said the amount of higher-risk paper pledged in repo transactions had risen to pre-financial crisis heights. A repo, or repurchase agreement, is a sale of a security coupled with an agreement to repurchase the security at a specified price at a later date. In the tri-party repo market, the three participants are the cash lenders, the cash borrowers, and the tri-party agent who facilitates the transactions. In the United States, cash lenders are made up mainly of mutual funds, custodial banks and other asset managers. Cash borrowers are typically fixed income securities broker dealers with securities that can be used as collateral. The tri-party agent is one of two government securities clearing banks. The large securities dealers depend on the tri-party repo market for the bulk of their short-term funding, while cash investors, such as money market mutual funds, count on it to be a very safe short-term investment. After the financial crisis exposed the vulnerabilities of the tri-party repo market's infrastructure, a task force was formed under the auspices of the Payments Risk Committee, a private sector body sponsored by the Federal Reserve Bank of New York. The group's final report, released last month, described numerous recommendations and the degree of their implementation - all intended to address potential systemic risk concerns. MORE RISK OR LESS? Against that backdrop, a study by Fitch Ratings rang an alarm, asserting the amount of higher risk "structured finance" paper pledged in repo transactions had risen as a portion of the overall collateral mix and returned to pre-crisis levels. Last week the Liberty Street Economics blog - published on the New York Fed's website but not necessarily reflecting the position of either the New York Fed or the Federal Reserve System - said the content of the Fitch seemed "worrisome" at first glance. But public data from the Tri-Party Repo Infrastructure Reform Task Force reveal "no evidence of a broad-based increase in riskier types of collateral," wrote Antoine Martin, an economist at the New York Fed, on the Liberty Street blog. The data represent 100 percent of the market's volume, while the Fitch study was based on data from a sample of prime funds, representing just 5 percent of the market's size. Prime funds invest in a diversified portfolio of high quality, short-term, U.S. dollar-denominated money market instruments. The Fitch study found a gradual increase in the share of riskier collateral financed through repos, in particular a big increase in the share of "structured finance" collateral - a type of collateral that had almost completely disappeared from the market during the financial crisis. Since the monthly data provided by the task force has only been published since May 2010, it does not allow comparisons with market dynamics in place before or during the financial crisis, but it makes it possible to look at recent trends, Martin wrote in his blog. Separating safer collateral (securities issued by the U.S. government or by government-sponsored enterprises) from riskier collateral (securities not issued by these institutions) shows the share of riskier assets serving as collateral in the tri-party repo market has decreased since mid-2011, Martin said. The amount of riskier assets like equities, corporate bonds and structured finance being financed in the tri-party repo market has also been decreasing slightly, he said. Meanwhile, median "haircuts" - the difference between the value of the collateral and the amount of cash received against it in a repo transaction - have been roughly flat, Martin said, with the exception of haircuts for structured products, which have recently increased. Responding to the Liberty Street blog, Fitch said it had based its conclusions on Securities and Exchange Commission data on money funds but remarked on the "excellent high-level overview" provided by the New York Fed data, which benefited from timeliness and frequency. "Either way, the greater transparency afforded by both the FRBNY and SEC disclosures enhances the market's understanding of risk trends in this critical funding market," Fitch said. MIX OF FUNDERS COULD BE CHANGING Joseph Abate, market analyst at Barclays Capital in New York, said the mixture of tri-party repo collateral does not appear to have changed significantly since 2010, but there could be a change in the mix of funders. "In a search for higher yield, prime funds may be reallocating their repo transactions away from government paper toward structured finance collateral," he said. Prime funds boosted their share of repo allocations to 16 percent by December from 12 percent last spring, he noted. But if prime funds are increasing their structured finance repo and the total volume of paper being financed is unchanged, then another repo market cash provider must be lowering its exposure to this collateral type, Abate said. Who that cash provider might be is hard to figure out because money market funds are not the only cash lenders in the repo markets, he said. Securities lenders, insurance companies, and others are important sources of collateral financing but unlike the money funds, data on their holdings "are not reported on a granular or frequent basis. "Indeed, as noted by others, this is a reason for expanding data collection in this market," Abate said.

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Money markets us bill supply may rise on lower tax receipts


* Weaker tax receipts seen raising federal borrowing* Meager income growth, capital gains seen cutting tax revenues* T-bill, repo rates steady after earlier declineBy Richard LeongNEW YORK, April 20 The U.S. government might ramp sales of Treasury bills later this year if tax receipts continue to run below last year's levels and federal spending holds steady at current levels. An increase in T-bill supply should exert upward pressure on short-term borrowing costs for Washington, banks and companies, analysts said on Friday."Bill issuance should pick up in the second half of this year," said Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch in New York. The amount of any increase in T-bill supply is unclear since it hinges on the Treasury Department's deciding on its offering of longer-dated coupon securities for the rest of the year and whether it will introduce a two-year floating-rate note.

T-bill rates stabilized on Friday after they had fallen earlier this week in anticipation of a shrinkage in supply with the repayment of more than $40 billion in bills on Thursday."We have seen steady buying all week," said Andrew Shulman, a bill trader at Wunderlich Securities in New York. Bids for ultra short-dated U.S. government securities persisted as worries lingered over the euro zone debt crisis even after Group of 20 nations on Friday were prepared to raise at least $400 billion in crisis funds for the International Monetary Fund, Shulman said.

In the $1.6 trillion tri-party repurchase agreement market, the overnight rate on loans for banks and Wall Street firms was last quoted at 0.13 percent mid-market, steady from late Thursday. In March, the Treasury began paring its weekly issuance during its annual period of personal income tax collection. However, tax receipts have been running below year-ago levels. There is a chance they could catch up in the coming days, "but indications are not very encouraging," Misra said. On a cumulative basis, non-withheld tax receipts through Wednesday totaled $48 billion, down from $58 billion during the same period last year, according to Misra.

She forecast this would reduce tax revenues by $25 billion this year compared with 2011."Even with tax issuance, the government still needs to compensate for last year's tax cut extensions," she said. Analysts blamed the lower tax receipts on sluggish income growth and meager capital gains in the stock market last year. While it might be some time before the Treasury decides on enlarging its weekly T-bill auctions, the amount of T-bills available in the open market will be buoyed by the Federal Reserve's $400 billion "Operation Twist" program, analysts said. The Fed's program involves selling its short-term Treasuries holdings and buying longer-dated debt with the goal to hold down mortgage rates and other long-term borrowing costs. Operation Twist is scheduled to end in June. On Monday, the Treasury will sell $30 billion in three-month bills and $28 billion in six-month bills .

Money markets us floating rate notes may pressure bill rates lower


* Treasury may announce floating rate notes on Weds * Questions remain over structure of any floating rate program * 3-month dollar, euro Libor rates unchanged on the day By Chris Reese NEW YORK, May 1 The U.S. Treasury may announce on Wednesday it will issue floating-rate Treasury notes in a move that could put downward pressure on short-term Treasury bill rates, analysts said on Tuesday. The Treasury has been in discussions with the financial community over the mechanics of issuing the notes, which would have a floating interest rate rather than a fixed rate like current Treasury debt, and could announce the program as soon as Wednesday when it gives details on its upcoming quarterly refunding needs. Such floating-rate issuance, initially expected to have maturities of 18 months to two years, could potentially put upward pressure on Treasury bill prices if it replaces a portion of the Treasury's normal bill issuance, analysts said. "We will have to see what gets reduced, if anything, to make room for these notes. The question is what gets replaced," said Josh Stiles, managing director at IDEAglobal in New York. The Treasury has been moving to extend the duration of its debt. If the floating rate notes issuance replaces other debt issuance it is expected to come at the expense of shorter-dated securities like Treasury bills, which would mean tighter supply in the bills market. While the Treasury could announce such a floating rate program on Wednesday, many questions remain over how the issuance would be structured. "It is kind of hard to say" if such a floating-rate program would impact the bills market, said Thomas Simons, money market economist at Jefferies & Co in New York. "We don't know what kind of maturities they would be offering, we don't know what the reference rate would be, so it is difficult to gauge the demand for such a product without knowing any of the parameters and we have to kind of surmise where the demand would be cannibalized from existing Treasury offerings." The Treasury is pondering issuing the floating-rate notes as part of an effort to prepare for any eventual slowdown in foreign purchases of the massive amounts of new U.S. debt, said Michael Cloherty, head of U.S. interest rate strategy at RBC Capital Markets in New York. "This is contingency planning so that if foreign buying slows a bit and we still have these massive deficits to finance, then you want to bring in every new potential buyer you possibly can, and by issuing floaters you may be able to bring in new investors that wouldn't have otherwise bought Treasuries," Cloherty said. "The argument here is not that this is going to be a cheap source of financing in 2013, the argument is that you are diversifying your investor base for the years to come when the ability to sell all of these Treasuries may become more challenging," he said. DOLLAR LIBOR STEADY Separately, euro three-month London Interbank Offered Rates (Libor) fixed at 0.63686 percent on Tuesday, which was unchanged from Wednesday, while three-month dollar Libor fixed at 0.46585 percent, which was also unchanged on the day. Dollar Libor has been trading in a very narrow range around 0.47 percent since early March, which Simons said may have to do with European banks being better capitalized since the European Central Bank pumped nearly a trillion euros of cash into the financial system in December and February.

Oman rules may spur reform of islamic finance scholars


Jan 30 Oman's new Islamic banking rules could encourage the development of a larger pool of sharia scholars and ultimately help to raise operating standards for them around the world, according to bankers and scholars. Last month, the sultanate's central bank released an extensive Islamic banking rulebook which included provisions for sharia scholars, such as fit-and-proper criteria and term limits on scholars' appointment to sharia boards, which decide whether products and activities obey Islamic principles. Oman is the last country in the six-nation Gulf Cooperation Council to introduce Islamic banking, but the level of detail in the rules could help set it apart from the others, and even give it some influence over global trends in the industry."I admire the positive spirit behind many articles in the law, which aims to achieve a higher level of good governance and avoidance of conflicts," said Washington-based scholar Muddassir Siddiqui, president and chief executive of ShariahPath Consultants LLC."Oman came from behind but it is now among the very few jurisdictions to introduce such a comprehensive set of rules. I am sure it will inspire others to follow."The objectives behind the rules include enlarging the pool of qualified scholars as well as addressing issues of scholar capacity and conflict of interest, Siddiqui added. Capacity refers to the amount of time scholars can devote to each of their board appointments; multiple commitments raise concerns that scholars may not be able to carry out their supervisory roles effectively. In an attempt to build a larger talent pool, Oman's rules state that scholars can only be appointed for three-year terms and serve a maximum of two consecutive terms, thus requiring banks to hire new scholars periodically. Such term limits are rare in Islamic finance, where scholar appointments have often been considered long-term or even permanent.

"I believe this is a good practice as it will provide an avenue to more scholars to share their expertise in the deliberation of a sharia supervisory board (SSB)," Mohamad Akram Laldin, executive director at the Malaysian-based International Sharia Research Academy for Islamic Finance, told Reuters. Both Laldin and Siddiqui are members of the sharia standards committee at the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), a major standard-setting body. AAOIFI, recognising that lengthy appointments "could lead to a close relationship which could be perceived to be a threat to independence and objectivity", recommends that institutions rotate at least one sharia board member every five years. But Oman's rules go further by applying term limits to all members. CALLS FOR REFORM Oman's rules struck a chord in the Islamic finance community because loose regulation of scholars is acknowledged by many people in the industry to be a major weakness, and an obstacle to growth.

There have been a series of calls for reform in the industry and AAOIFI has said it will conduct consultations on how sharia boards operate. A final draft of its conclusions is not expected to be ready before the end of this year at the earliest, however, and analysts warned that it remained to be seen whether Oman's approach would be adopted in other jurisidictions where entrenched interests might be reluctant to change. Some analysts said Oman's rules would need to be complemented by other initiatives, to avoid potential bottlenecks forming in the industry."A scholar development program needs to be developed in parallel with this initiative," said Laldin, also a member of the sharia board of Malaysia's central bank and the Bahrain-based International Islamic Financial Market.

If young talent cannot be groomed, the available pool of scholars may not be big enough, turning the rules into a cosmetic procedure in which the same scholars simply rotate from one board to another, Laldin said. Also, for Oman's approach to be adopted elsewhere, it may have to yield clear, near-term benefits that encourage others to imitate it."Taking into account the experience of Malaysia, when it ruled that scholars cannot sit on multiple boards, no other countries followed in imposing a similar restriction," Laldin noted. Jamsheed Hamza, senior manager of the Islamic banking division of Oman's Bank Dhofar, said one likely benefit of the Omani rules would be keeping costs down."The scarcity of scholars as well as the demand for a few prominent names have taken the SSB cost to a very high level. In contrast, the restriction by the regulator as well as the opportunity of grooming more scholars will surely pin down the cost to a more reasonable level."In Oman, there will initially be demand for scholars from eight institutions: two new, full-fledged Islamic banks, Bank Nizwa and Al Izz International Bank, and the Islamic windows of six conventional banks. Each bank will need a sharia board comprising at least three scholars, who will not be allowed to serve in two competing Islamic financial institutions within the country. Oman will also need a sharia board at the central bank level to manage implementation and monitor adherence to rules, similar to the set-up in Malaysia, Siddiqui added. He serves on the sharia board of Oman's Bank Sohar and the Fiqh Council of North America. The absence of a central board could cause delays in the issuance of rulings, duplicate efforts and add to costs for Islamic financial institutions, he said. A central board could also facilitate issuance of sovereign sukuk (Islamic bonds), currently being discussed by the central bank.