The Good, The Bad And The Ugly?
Following up on the Man With No Name in For A Few Dollars More?.. which examined the what happened September 16th. A dig into the how and why, Part 3 of our "blood money" repo-ruckus series reveals not everything is as it seems, and debt can trump cash?
While we attempt to translate financial-ese gobbly gook into something more palatable, as we oft Natter at the Twitter afflicted, pay attention because the Devil is in the details and as always there is The Good, The Bad And The Ugly...
With The Good, The Bad And The Ugly in mind, from Tuesday, September 17th Nuance and Timing? which was penned the night of September 16th...
What collateral do you have to SWAP for this "limited offer" cash? UST's. What do you mean your fully "booked up" for the night? You'll only take the risk of holding my UST overnight "For A Few Dollars More?"
And so the Fed "sheriffs" were forced into repo. At the crux of the primary dealer balance sheet constriction is a perversion of pure folly. How so? LCR rules don’t permit banks to treat as HQLA, the funds that those banks have deposited with the Fed to meet their reserve requirements. Say what? And how did this SNAFU come about?
While those who don't know a debit from a credit were out playing, those who know how to generate debt and demand for it were making the rules...
Since the GFC, the definition of deposits has changed and the regulations now classify cash deposits as either operating or non-operating. The chapter and verse which changed everything...
Bank deposits, government MMF's, T-Bills and CP are the top vehicles for investing short term cash. Under the new definition...
Can you say limited and negative return? As the benefits of non operating deposits are unlikely to cover the associated costs, it would be expected that the market has seen a significant decrease in a bank’s ability to hold non operating deposits on balance sheet.
Bottom line, to hold deposits or CASH BALANCES under LCR for "operational" purposes, the banks are assessed an enhanced liquidity premium (matching against HQLA, leverage ratio and GSIB assessment) over and above auction rate government securities.
Thus, interest bearing CASH reserve balances, held at the 12 FRB districts which are owned by the member banks and their clients, are treated as a pariah or persona non grata. Speaking of which...
Despite "The Good, The Bad And The Ugly" the monetary wizards inhabiting Hogwart's At Eccles claim there is "no problem"? Put oneself in the primary dealers position, and one might be advised to do as Tuco said?
Recommended Reading:
A Fistful Of Dollars?
For A Few Dollars More?
New Rules: Money Market Fund Reform
A Defining Moment
While we attempt to translate financial-ese gobbly gook into something more palatable, as we oft Natter at the Twitter afflicted, pay attention because the Devil is in the details and as always there is The Good, The Bad And The Ugly...
With the FX hedged (JPY, EUR) UST buyers being priced out due to the more important inversion in October 2018, the already UST inventory bloated dealers are on the hook to buy the $800B surfeit of issuance coming down the auction pipe.
Lacking any margin buyers, there will be little to no balance sheet capacity for those dealers to fund or make other market activities, think the non banks.
To prevent a freeze in repo (either or both tri-party repo and FICC sponsored bilateral) the Fed could be forced into conducting open repo and/or being the buyer of last resort = QE4.Monday September 16th... Elevator Version: Where's the money? Where were the guys supposedly holding the money? Didn't ANYBODY (MMF's, FHLB) have any CASH to arb a profit?
What collateral do you have to SWAP for this "limited offer" cash? UST's. What do you mean your fully "booked up" for the night? You'll only take the risk of holding my UST overnight "For A Few Dollars More?"
And so the Fed "sheriffs" were forced into repo. At the crux of the primary dealer balance sheet constriction is a perversion of pure folly. How so? LCR rules don’t permit banks to treat as HQLA, the funds that those banks have deposited with the Fed to meet their reserve requirements. Say what? And how did this SNAFU come about?
While those who don't know a debit from a credit were out playing, those who know how to generate debt and demand for it were making the rules...
Since the GFC, the definition of deposits has changed and the regulations now classify cash deposits as either operating or non-operating. The chapter and verse which changed everything...
"the agencies do not believe that the assets held to satisfy a covered company’s required reserves would entirely be available for use during a liquidity stress event due to the reserve requirements." See Liquidity Coverage Ratio: Liquidity Risk Measurement Standards, 79 Fed. Reg. 61440 (Oct. 10, 2014) (final rule) at 61456Translated, this key perspective or point of view fueled by a belief or fear in liabilities (right or wrong)...
"cash held in deposit accounts in excess of operating deposits would become scarce during a stress event and therefore couldn’t be relied upon during an isolated bank stress event. These deposits are defined as non operating and classified as short term wholesale funding (STWF)."Henceforth, operating deposits require quantitative substantiation of their use to support transactional activity, and everything else is non operating. Both the return on, and the bank’s appetite for their cash, depends greatly on said classification and the opinion of what are reliable funding vs less reliable funding sources. Along those lines...
A Defining Moment
Bank deposits, government MMF's, T-Bills and CP are the top vehicles for investing short term cash. Under the new definition...
non operating deposits = money market funds, repo, commercial paper AND MOST IMPORTANTLY bank deposits considered in "excess" of operational "need". Notice what is omitted from the list? UST's, how convenient?And as it always does, it gets better... a significant portion of deposit liabilities (non operating cash) needs to be backed by High Quality Liquid Assets (HQLA), read UST's and placements at select central banks, and must be maintained by the bank which increases the cost of holding non operating deposits on their balance sheets.
Can you say limited and negative return? As the benefits of non operating deposits are unlikely to cover the associated costs, it would be expected that the market has seen a significant decrease in a bank’s ability to hold non operating deposits on balance sheet.
Bottom line, to hold deposits or CASH BALANCES under LCR for "operational" purposes, the banks are assessed an enhanced liquidity premium (matching against HQLA, leverage ratio and GSIB assessment) over and above auction rate government securities.
Thus, interest bearing CASH reserve balances, held at the 12 FRB districts which are owned by the member banks and their clients, are treated as a pariah or persona non grata. Speaking of which...
Despite "The Good, The Bad And The Ugly" the monetary wizards inhabiting Hogwart's At Eccles claim there is "no problem"? Put oneself in the primary dealers position, and one might be advised to do as Tuco said?
Now that one can better understand the situation and predicament, sovereign debt is treated more favorably than cash, isn't that extra special? Or Good? Bad? and Ugly? As with Tuco, there is still more than meets the eye. More to come on the how and why, when the Man With No Name returns in Part 4: A Coffin Full Of Dollars? Stay tuned, no flippin.
Recommended Reading:
A Fistful Of Dollars?
For A Few Dollars More?
New Rules: Money Market Fund Reform
A Defining Moment
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