April 16 (Reuters) – (The following statement was released by the rating agency)
An updated Fitch Ratings review of collateral within the triparty repo market highlights some of the inherent liquidity risks associated with financing non-government securities through this short-term funding mechanism, as discussed in a report published today.
Repos remain an important funding mechanism for a range of asset classes. Federal Reserve Bank of New York (FRBNY) data indicates that, as of March 2013, approximately $ 1.83 trillion in assets were financed by the U.S. triparty repo market, a 10% increase since the beginning of 2012.
According to FRBNY data, structured finance represents approximately 4 – 5% of total U.S. repo collateral, equating to roughly $ 75 billion funded through this short-term credit market. The amount of structured finance funded through tri-party repo is about 10x the average daily trading volumes for these securities, an indication of the potential challenges should any reductions or disruptions to triparty repo funding for these assets occur.
Based on Fitch’s analysis of the disclosures of U.S. prime money market funds (MMFs), which provide unparalleled detail on repo collateral, structured finance repo is typically collateralized by deeply discounted, small-sized legacy securities. Over half of Fitch’s sample consists of subprime and Alt-A RMBS and CDOs.
Since money funds are short-term, highly risk-averse investors, a reduction in MMF appetite for this form of collateral could negatively affect the underlying asset class and repo borrowers more broadly.
Several senior government officials and agencies have highlighted the risks of using short-term wholesale funding, including repo, to finance less liquid assets. Fitch’s prior research demonstrated that repo funding for structured finance assets largely evaporated at the height of the U.S. credit crisis. Fitch believes this loss of liquidity likely contributed to the steep valuation declines in this asset class during that period.
For some money funds, structured finance repos provide a higher return opportunity in the ongoing low-yield environment. Repos also provide security dealers a source of leverage and cost-effecting funding for their structured finance securities.
The full report ‘Repos: Non-government Assets Still Prominent’ is available at ‘www.fitchratings.com.’ This report updates Fitch’s previous report ‘Repos: A Deep Dive in the Collateral Pool’ published August 2012.
Link to Fitch Ratings’ Report: Repos: Nongovernment Assets Still Prominent
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RPT-Fitch: Non-government Assets Remain Prominent within Repo Markets
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