High Line Advisors LLC

management ideas for banks and broker-dealers

Archive for August 2012

Money fund and repo reform: fix both for the price of one

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While the SEC concerns itself with reform of money market funds and the Federal Reserve calls for reform of the tri-party repo market, let us recognize the link between the two and the potential to address both concerns with a single solution: cleared repo.

Money funds need a safe place to invest without credit risk, without the need to manage or liquidate collateral, and with guaranteed return of cash on schedule.

While the tri-party repo market remains central to the lending of cash by corporations and mutual funds largely to banks and broker-dealers, it remains subject to credit shocks and concentrates liquidity demands on the two agent banks without the responsibility or the means to liquidate collateral.

Moving the repo market onto a central clearinghouse or counterparty (CCP) can be done in such a way as to  to insulate lenders from collateral management and default risk, while at the same time eliminating daylight exposure for banks.

With the core of money fund investment (lending) going through a CCP, the SEC can have both transparency and confidence in fund liquidity. Likewise, the FRB can share in that transparency as well as the certainty that loans are continuously backed by collateral.

SEC’s Schapiro Cancels Vote on Money-Fund Curbs – WSJ.com http://on.wsj.com/PdEAs0

Written by highlineadvisors

August 23, 2012 at 1:28 pm

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