A decade after the financial crisis, regulators still don’t collect the data necessary to understand and act on risks in the repo market.
The Federal Reserve said it injected of $53 billion into U.S. short-term money markets on Tuesday to stem a spike in interest rates for repurchasing agreements, or repos - the overnight funding market that felled Lehman Brothers in 2008 and MF Global back in 2011.
In 2010, the SEC proposed a rule in response to Lehman’s lack of disclosure of its Repo 105 liabilities. Called “Short-Term Borrowings Disclosure,” the SEC’s proposal said “a critical component of a company’s liquidity and capital resources is often its access to short-term borrowings for working capital and to fund its operation.”
Accounting rules permitted the repo transactions to be treated as sales. That allowed Lehman to report a lower asset balance — it reported the Treasurys and mortgage backed securities as sold not lent — since the cash it received in the borrowing was less than the value of the assets it had pledged. Gelzinis says the recent spike in repo rates may have had a few idiosyncratic causes, and certainly doesn’t signal the type of run seen in 2007-2008, “but regulators should take this week’s turbulence as an opportunity to re-evaluate the fragility of this short-term funding market.”
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