Fed Rate Cut Triggers REPO Surge: Why Understanding This Market Matters

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Repurchase agreements (REPOs) are pivotal to the efficient working of almost all financial markets, and understanding their pricing can provide an important role in assessing interest rate risk and opportunities.

The US central bank finally answered calls for a cut in interest rates with the Federal Reserve lowering rates for the first time in four years this September.

The Fed made a bigger than usual cut, reducing the target for its key lending rate by 0.5 percentage points, to the range of 4.75%-5%.¹

The market response was swift – and in some cases pre-empted the Fed’s announcement – with a surge in activity on the REPO markets from participants keen to take advantage of lower borrowing rates.

On 17 September, CME Group announced that SOFR futures had reached a new, all-time record average daily volume (ADV) of 5.4 million contracts and an open interest record of 13,159,646 contracts.² Access to this type of REPO data is essential for understanding interest rate risks and opportunities because the market directly reflects short-term interest rate dynamics, collateral valuation, and liquidity conditions.

For example, back in September 2019, the cost of borrowing soared in the US as banks with dwindling cash reserves operating under stringent post-financial crisis liquidity rules became reluctant to lend to one another. The spike in REPO rates drove short-term interest rates higher which in turn forced the Fed to inject tens of billions of dollars into the system through quantitative easing³.

Had market participants been analyzing REPO rates, collateral usage, and market liquidity, they may have had a greater insight into their exposure to market risk.

Detailed and timely REPO reports provide valuable intelligence into how changes in interest rates impact their borrowing costs, risk exposure, and potential vulnerabilities in the financial system.

REPO data helps traders, financial institutions, and regulators manage interest rate risk more effectively, ensuring stability and informed decision-making in both the REPO market and the broader financial landscape.

Parameta Solutions, the data and analytics division of TP ICAP Group which is the world’s largest inter-broker dealer, has unparalleled access to REPO market data.

Our experts aggregate data from four of our top venues – PREBON Repo/NY, tpREPO, TP Repo LDN and GARBAN Repo/NY – to provide a report with essential data on REPO specials, general collateral and general collateral financial.

The daily report can inform a range of workflows, including:

• Interest rate risk management: having access to this data means clients can assess the potential impact of interest rate changes on their portfolios and therefore implement hedging strategies to mitigate risk.

• Liquidity risk management: by monitoring REPO rates and volumes, it is easier to see the availability of liquidity in the market and adjust funding strategies accordingly.

• Trading opportunities: REPO rates can offer arbitrage opportunities between different markets and maturities. Our data can help clients identify and exploit these opportunities.

• Model validation: REPO data can be used to validate and calibrate quantitative models.

Interest rates look likely to continue to fall as central banks bring inflation under control. As market participants react to the changing economic conditions, using Parameta’s REPO reports can provide important market data that can play a central role in determining their borrowing and lending decisions.

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