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The gilt repo market is an essential funding market for the non-bank sector and facilitates the movement of cash and securities around the financial system (Bank for International Settlements ). Cash lenders in repo markets are able to generate low-risk returns while still holding liquid collateral, and cash borrowers can use repo markets to meet liquidity needs or to increase their leverage.

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• In addition, these liquidity needs could be greater as a result of underlying vulnerabilities.
• First, the time periods used for the types of flows differ due to limited data granularity.
• For instance, we do not account for the effects of liquidity needs in non-sterling currencies, which are known to have played an important role during the ‘dash for cash’.
• We use the transaction-level MiFID II database, maintained as the ‘Market Data Processor’ database by the Financial Conduct Authority, to analyse NBFI volumes in the UK gilt and corporate bond markets.
• While hedge fund exposure to gilts is relatively small in comparison to other sovereign bond markets, it is large relative to other non-bank sectors.

To do this, we implement an algorithm to disambiguate between multiple reports and identify the identity and quantities transacted, of the ultimate buyer and seller from multiple counterparties that may be involved. To facilitate this, we also implement an algorithm to detect any reporting errors made by firms.

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Rather, the hedge fund sector accumulated gilts in both the ‘flight to safety’ and ‘dash for cash’ periods. Chart 3.13 in the following section also shows the limited extent of net borrowing by hedge funds in the gilt repo market before the ‘flight to safety’, underlining the limited prevalence of this leveraged arbitrage strategy in the UK gilt market.

Each transaction report from a legal entity contains information on the transaction date and time, International Identification Securities Number , execution price, transaction quantity, as well as the reported legal identities of the buyer and seller. Second, the analysis in this paper is focused on sterling-denominated assets and therefore does not account for the effects of liquidity needs in other currencies, which are known to have played an important role during the ‘dash for cash’ . As an example, NBFIs borrowing in short-term dollar markets may have led to an increase in liquidity needs as these positions became more expensive to roll over. Since these liquidity needs may have had an effect on sterling markets , it would be helpful to assess the importance of cross-currency liquidity needs during the ‘dash for cash’.

VM calls are estimated using the EMIR Trade Repository Data on interest rate swaps, forward rate agreements, inflation swaps, and cross-currency basis swaps. Schrimpf, A, Shin, H S and Sushko, V , ‘Leverage and margin spirals in fixed income markets during the Covid-19 crisis’, Bank for International Settlements Bulletin No. 2, April. Noss, J and Patel, R , ‘Decomposing changes in the functioning of the sterling repo market’, Bank of England Staff Working Paper No. 797, May. Liang, J N , the best crypto exchange ‘Corporate bond market dysfunction during COVID-19 and Lessons from the Fed’s Response’, Hutchins Center Working Paper No. 69, October. Hüser, A-C, Lepore, C and Veraart, L , ‘How does the repo market behave under stress? Evidence from the Covid-19 crisis’, Bank of England Staff Working Paper No. 910, June. Funds must have at least 30% of their portfolio invested in the asset class and region (advanced economies or emerging market economies ) to be considered as part of each category.

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The Bank of England’s Sterling Money Market data collection, Form SMMD, is a transaction-level data set covering the sterling unsecured and secured money markets. The data have been collected since 2016, and is obtained from dealers in the respective money markets. This paper uses data relating to the gilt repo market to analyse the actions of NBFIs over the ‘dash for cash’ episode in March 2020. The data cover 95% of activity where a bank or dealer is a counterparty, but do not capture any non-bank to non-bank repo trades. Where data on repo amounts outstanding are used, the figures provided account for maturing repo in each period. As for the cash gilt/corporate bond data, we allocate investors to an investor group using a best-endeavour sectoral classification. Moreover, some funds had to meet margin calls on their derivative exposures, adding further pressure on their liquid asset holdings.

In total, the steady rise in the borrowing of ICPFs and hedge funds over the ‘flight to safety’ period led to a cumulative net cash demand from NBFIs of around £10.5 billion by 6 March. It should be noted that while we focus on the NBFI activity in the gilt market, the interdealer component also makes up a significant proportion of traded volumes in gilts in gross terms. We include interdealer transactions in our analysis but do not focus on this market segment – see Annex for more details on the data used in this paper. It was only once the Bank of England and other central banks announced additional large-scale liquidity injections that market functioning started to recover. This quickly improved market functioning, although financial conditions remained tighter than normal for a period and continued interventions were necessary to support businesses and households through the crisis, and limit any lasting damage to the economy. The Bank’s Financial Stability Reports and the Financial Stability Board’s (FSB’s) Holistic Review have provided evidence on how vulnerabilities in the non-bank financial system catalysed the ‘dash for cash’ across global financial markets.

To facilitate the large redistribution of liquidity across the system, gross transaction volumes in gilts were very high during the ‘dash for cash’ period relative to the average activity in 2019. As shown in Chart 3.3, dealers’ weekly trading volume in gilts was 60% higher than their average weekly trading volume during 2019, while ICPF’s volumes during the ‘dash for cash’ were 2.4 times higher. These flows were intermediated by the banking system, although dealers’ capacity for intermediation was particularly tested by the weight of demand from clients wishing to sell gilts relative to those wishing to buy. Furthermore, redemptions from open-ended funds resulted in selling in gilt and corporate bond markets. Outflows from OEFs investing in advanced-economy bonds started in mid to late February, and reached up to 5% of assets under management in March. For example, sterling corporate bond funds faced total net outflows of around £1.4 billion (around 1.3% of their AUM) during March. These net outflows mask significantly larger outflows during the ‘dash for cash’, which were partly offset by inflows received during the ‘flight to safety’.

Asset prices fell sharply and suddenly, volatility increased substantially, and market liquidity dried up as market participants reacted to the impact of the pandemic on economic activity and the uncertainty around the scope and duration of public health measures. Another excellent reason to choose a dashboard camera is to help with your car insurance. Of course, as mentioned above, a dash cam gives you the proof you need to avoid liability in the event of an accident. We explain how and compare a range of providers that can give you access to many brands, including SoFi Technologies. We explain how and compare a range of providers that can give you access to many brands, including Andina Gold. We explain how and compare a range of providers that can give you access to many brands, including Infobird. We explain how and compare a range of providers that can give you access to many brands, including Alterity Therapeutics.

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And the NBFI sector had a significant net demand for liquidity which it tried to meet via sales of bonds, and via funding through repo markets. Volatility also increased the costs of market-making for dealers, which were facing increased demand for intermediation as well as a reduced supply of repo funding. As a result, dealers widened their bid-ask spreads in repo and bond markets, exacerbating illiquidity. In addition, the volatility in yields, coupled with funding illiquidity, imposed losses on highly levered investors, some of which became forced sellers of both safe and risky assets.

For instance, meeting margin calls by withdrawing OEF shares could result in these funds needing to sell gilts as well as risky assets, or needing to withdraw shares from MMFs. Similarly, withdrawing MMF shares in order to meet liquidity demands could result in MMFs needing to withdraw cash from short-term funding markets.

As financial asset prices saw rising volatility, derivative exposures had to be adequately capitalised to manage counterparty credit risk. NBFIs with derivatives exposures were required to post margin collateral, cryptocurrency and hence saw a rise in their liquidity needs. Strikingly, MMFs first saw large aggregate inflows of more than £16.5 billion in early March, including the first few days of the ‘dash for cash’.

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…but also gilts, likely contributing to the offsetting of ‘flight to safety’ trades and ultimately the ‘dash for cash’. …but they are likely to have increased most sharply once the ‘dash for cash’ period had already started. Percentiles of daily net purchases calculated using gilt transactions from 3 January 2018 to 19 March 2020. Dealers’ volumes also include interdealer trading volumes and volumes traded with other sectors not shown on the chart.

During the ‘flight to safety’ period, the majority of ICPFs increased their term gilt repo borrowing.footnote The sector likely took this action to raise cash so that they could hedge their liabilities as gilt yields fell, as outlined in the previous section. Hedge funds also increased their borrowing by around £8 billion during this period, predominantly in the medium maturity section of the market. Market intelligence suggests that this was possibly as a means of funding long positions in sovereign bonds, to profit from falling yields. Over the same period, hedge funds increased their lending by approximately £2 billion, giving a net borrowing figure over the ‘flight to safety’ of around £6 billion. MMFs reduced their net lending by approximately £2 billion over the ‘flight to safety’ period (Chart 3.12, Panel 1).

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Derivative users post collateral to cover both current counterparty exposures and potential future exposures, thereby reducing the risk that the failure of one counterparty causes losses or defaults for other counterparties and therefore systemic problems. Derivative users are required to settle changes in the market value of the trade at least once a day via variation margin . Initial margin is posted to cover the loss that could incur between the default of a counterparty and the closing-out of a position, and is recalculated on a regular basis. This contributed to extremely elevated rates at both overnight and term maturities in gilt repo and a drying up in volumes in the term market. Repo and reverse repo in the chart above are defined from the perspective of the dealer, where a repo trade is a dealer borrowing cash from a counterparty and a reverse repo trade is a dealer lending cash to a counterparty.

The net corporate bond sales of the asset management sector started in late February, but significantly increased towards the beginning of the ‘dash for cash’, with a peak daily net sell volume of almost £500 million on 16 March. On aggregate, asset managers sold corporate bonds worth around £2.5 billion during the ‘dash for cash’ alone (Chart 4.6). Furthermore, OEFs also redeemed shares from MMFs, thereby contributing to the large MMF outflows during the ‘dash for cash’.

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Our data also show that the biggest increases in gross trading volumes reflected transactions with the NBFI sector, which has grown as a proportion of the financial system. For example, the weekly gilt trading volume of insurance companies, pension funds and liability-driven investment asset managers during the ‘dash for cash’ was more than double their average weekly trading volume in sell dash 2019. Furthermore, asset managers, hedge funds and the foreign official sector all had a similar, significantly heightened demand to transact in the gilt market. These transactions were intermediated by the banking system, although dealers’ capacity for intermediation was particularly tested by the weight of demand from clients wishing to sell gilts relative to those wishing to buy.

Автор: William Edwards