Sponsored Repos are Surging

Post-crisis leverage rules have constrained overnight lending in the critical market for short-term loans called repurchase agreements or “repos” but banks and others have been developing solutions to help minimize the impact.

As a result of the rules, many banks and broker dealers have had a reduced capacity to act as middlemen on repos, in which hedge funds often use Treasuries to get access to cash and money market funds typically put up the cash in exchange for bonds to earn interest.

Under a popular new arrangement, the cash lenders and hedge-fund borrowers still negotiate their individual trades with the middlemen as before, but the trades are then transferred or “novated” by the intermediary to an industry utility called a clearinghouse. The intermediary then steps out of the trade but guarantees the financial performance of the client to the clearinghouse.