JPMorgan Chase (NYSE:JPM) and Goldman Sachs (NYSE:GS) have each found ways to trade in the $1.2T U.S. repo market that will limit regulatory burdens, potentially easing a cash crunch at the end of the year, the Financial Times reports.
Some financial industry watchers are expecting turmoil in the next couple of days, as lenders tend to cut back on repo activities at year-end, when global regulators look at banks’ balance sheets to determine whether they have enough capital to continue trading even if there were a big hit to the financial system.
JPMorgan has been encouraging clients to use so-called “sponsored repo” deals, where a clearing house allows dealers to net transactions off against each other, the FT reports, citing people with direct knowledge of the bank’s strategy.
Goldman is using derivatives known as total return swaps that carry lower capital requirements than regular repo trades, the newspaper said, citing people familiar with the change.
The moves, designed to minimize the banks’ own capital requirements, should also help alleviate cash pressures in the market, analysts said.
Both banks have “taken steps to be ahead of the game at year-end,” said Jeff Drobny, CEO of hedge fund manager Garda Capital Partners. “It’s sensible.”
Total return swaps give hedge funds a way to reproduce highly leveraged Treasury investments away from the repo market. The returns are created synthetically without owning the security and allows funds to boost potential profits without borrowing more cash through repos.
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