Early last week, we provided an overview of State Street Global Advisors' "2019 Global Cash Outlook," including a brief overview of the segment entitled, "The Future is Coming." (See our Feb. 4 News, "SSGA Discusses ESG MMF Challenges, Tech, AI.") Below, we look again at this update, which discusses the possibility of 24-hour trading in money market mutual funds, and we also cite a press release from the OFR on Repo and a WSJ article on SOFR and LIBOR.
Will Goldthwait, portfolio strategist for SSGA's Global Cash and Fixed Income Investment Management Teams, explains in the Outlook, "We think new features of cash management will include more than centralized trading platforms and enhanced liquidity and risk-monitoring." He went on to add color to the idea of "Looking toward the 24-hour, 7-day, 7-continent MMF." Goldthwait posed the question, "Need retail cash at 3:00 a.m.?" That is not a problem for bank customers anywhere in the world right now, even on a Sunday. But for institutional cash investors, no action can be completed outside of regular business hours, he pointed out.
The reason? Limits inherent in the Federal Reserve's payment system. He explains, "The system for transferring funds between banks and businesses handled over $1 quadrillion in transactions in 2016, but it does not reflect the automated, 24/7, instantaneous nature of contemporary business. By the Fed's own description, it works on a deferred basis, 'a buildup of obligations -- like IOUs between banks -- that could present real risks to the financial system in times of stress.' This helps explain MMF deadlines and end-of-day closures, established to minimize settlement risk."
There are moves afoot to develop a new system, he says, that "would introduce 'real-time gross settlement,' which promises to operate 24/7 and settle each payment as soon as it is sent." Goldthwait continues, "This would allow credits and debits to clear immediately, potentially reducing risk. Perhaps it would introduce the ability to borrow for only hours instead of days; would a 6-hour load be more flexible and profitable for both the borrower and lender? Some institutions are familiar with this in the form of 'daylight overdraft charges.' Would an intraday loan help this situation?"
He adds, "The Fed has long held the responsibility of modernizing the payment system. In the early days of the 19th century when it could take a week or month for a New York bank to clear a check drawn on an Alabama bank, the Fed established a more efficient system to move money. In 1973, when that physical check clearing system became overwhelmed, the Fed worked with the private sector to create the Automated Clearing House. If the Fed implements its plan for developing a real-time gross settlement system, we believe the money fund industry would seize the opportunity."
In other news, a press release entitled, "Office of Financial Research Adopts Data Collection Rule," tell us, "The U.S. Office of Financial Research adopted a final rule today to establish a data collection covering centrally cleared funding transactions in the U.S. repurchase agreement (repo) market. The daily collection will enhance the ability of the Financial Stability Oversight Council to identify and monitor potential risks to U.S. financial stability by closing the data gap related to centrally cleared repo transactions."
It explains, "The collection will also support the calculation of certain reference rates, particularly alternatives to the U.S. dollar London Interbank Offered Rate (LIBOR). LIBOR has been used as a benchmark to set interest rates on trillions of dollars of home mortgages, private student loans, corporate loans, derivatives, and other financial products. LIBOR participation declined after LIBOR-related misconduct, creating the need by industry and regulators for an alternative."
The OFR writes, "As a result of this need, the Federal Reserve formed the industry-led Alternative Reference Rates Committee, which selected the Secured Overnight Financing Rate (SOFR) as the preferred LIBOR alternative. Cleared repo data from the collection will be used to enhance the production of the SOFR. The data collection will help inform U.S. financial regulators and market participants about potential risks in the financial system, while helping to fill an important need for a LIBOR alternative with minimal regulatory burden."
They add, "The rule requires the submission of information by central counterparties with average daily total open repo commitments of at least $50 billion. The Fixed Income Clearing Corporation would be the only market participant required to report if the collection began today, but other firms could meet the eligibility criteria for reporting in the future. The collection is expected to begin in mid-October."
Finally, yesterday's Wall Street Journal featured the article, "The Benchmark Set to Replace Libor Suffers Volatility Spike," which says, "Recent volatility in the market for overnight cash loans is raising concerns about a new benchmark that could set interest rates for trillions of dollars in mortgages and corporate debt."
The piece explains, "The cost to borrow cash overnight spiked late last year in part of the market for repurchase agreements, where lenders such as money-market funds make short-term loans to bond brokers, often using government debt as collateral. The 'repo' rate topped out above 6% in intraday trading on Dec. 31 before settling at an all-time high of 5.149%, according to JPMorgan."
The Journal says, "The supply of securities that are used for collateral in the repo market has grown as the Treasury has increased its sales of short-term debt to help fund rising budget deficits. At the same time, demand for the securities has increased after the banking industry's central clearinghouse for bonds, the Fixed Income Clearing Corp., began allowing banks to sponsor hedge funds as direct participants in repo trading."
They add, "The repo market 'is absolutely an indispensable grease and catalyst to the smooth functioning of other markets,' said Glenn Havlicek, a former banker who is now chief executive of GLMX, a technology company that is providing tools to repo trading firms, with the aim of making it easier to transact and report pricing. 'But it was never anticipated for prime time. There are definitely growing pains.'"
