Cleveland Fed researchers look at trends in MMMFs; tri-party repos; and levels of financial stress
At its peak, around $2 trillion worth of securities changed hands daily in the tri-party repo market, where borrowers pledge their securities as collateral for the cash they want to borrow. The market value of the securities involved in these deals (i.e., the total collateral value) rose steeply after 2011, peaked toward the end of 2012, and then fell steeply. Federal Reserve Bank of Cleveland researchers Mahmoud Elamin and William Bednar say an increase in Fed purchases and holdings of agency securities might have been responsible for some of the decline in the volume of agency securities traded in the tri-party repo market.
In the wake of Lehman Brothers’ failure in 2008, a money market mutual fund (MMMF) called the Reserve Primary Fund experienced substantial outflows, due to concerns about the fund’s credit exposure to Lehman. These events triggered large withdrawals from other MMMFs, resulting in Treasury and Federal Reserve programs to mitigate the outflows. Federal Reserve Bank of Cleveland economist Lakshmi Balasubramanyan looks at where MMMFs stand today, in terms of their riskiness and their ability to meet sudden liquidity requirements. She finds that the liquidity positions of prime funds have weakened somewhat since 2011 (when the data became available). While posing no immediate threat to financial stability, Balasubramanyan says regulators must keep an eye out for large fluctuations in MMMF’s holdings of liquid funds, which can pose a threat in the event of financial stress.
The Cleveland Financial Stress Index (CFSI) has remained in a Grade 1 or “low stress” period throughout most of the first quarter of 2014. The index trended upward in January and early February, crossing into a Grade 2 or “normal stress” period, largely due to increased contributions of the equity market to overall financial stress, according to Federal Reserve Bank of Cleveland analyst Amanda Janosko. The CFSI then subsided while remaining at an elevated level within Grade 1.
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