On August 13, 2014, the Federal Reserve Bank of Boston and the Federal Reserve Bank of New York sponsored a “Workshop on the Risks of Wholesale Funding.”
Eric S. Rosengren, President & Chief Executive Officer of the Federal Reserve Bank of Boston, gave the keynote address which focused on the source of funding by broker-dealers and particularly their reliance on the repo market as a primary source of funding. Mr. Rosengren expressed concern that a broker-dealer’s repo funding could evaporate in a financial crisis and leave the broker-dealer subject to significant funding problems.
Remedies to reduce these risks that were floated by Mr. Rosengren included:
- increased capital requirements for insitutions dependent upon short-term funding;
- increased use of long-term subordinated debt as a source of funding;
- limiting the amount by which repos could be used to finance long-term assets or high credit risk assets;
- prohibiting money market funds from holding repo secured by collateral that such funds could not purchase directly; and
- mandating minimum haircuts in the repo market.
It seems likely that the implementation of any of these reforms will result in a further reduction in the size of the U.S. repo market. And, that outcome seems to increasingly be a goal of U.S. regulators.
Good day. Good reading.