OFR Short-term Funding Monitor - Market Digests

Primary dealer reverse repo and securities borrowing by tenor

Aggregate outstanding volume in reverse repo and securities borrowing for primary dealers broken out by tenor

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Primary dealers serve as intermediaries in securities markets, receiving securities from sellers and delivering them to buyers. They also serve a unique role in purchasing Treasury securities at auction and acting as a counterparty to the Federal Reserve. Primary dealers commonly use reverse repurchase agreements (reverse repo) to temporarily secure inventories to offer to buyers. In a reverse-repo transaction, dealers lend cash on a short-term basis while accepting securities as collateral. Securities borrowing is an alternative to reverse repo. Much as with reverse repo, in securities borrowing primary dealers borrow securities, often on a short-term basis. A key difference between securities borrowing and reverse repo is that securities borrowing contracts tend to allow lenders to recall the underlying security at will, which makes securities lending convenient for equity holders who want the option to exercise voting rights. As a result, securities borrowing tends to be more common with equity instruments, while reverse repo tends to be more common with fixed-income instruments.

This chart shows a breakdown of primary dealer securities borrowing and reverse repo positions by tenor. Tenor is the amount of time between the initial trade of cash for securities and the repurchase of those securities. Primary dealers' financing needs can vary by time horizon, leading to demand for loans of a different tenor. Shorter-tenor trades maximize lenders' liquidity, typically reducing rates primary dealers have to pay. However, when primary dealers borrow in shorter-tenor trades they carry the risk that financing rates increase or that financing becomes unavailable, which is referred to as rollover risk. In addition, longer-tenor trades are treated differently for regulatory purposes than shorter-tenor trades. Examining volume across tenors for primary dealers provides a window into the availability of and demand for financing across time horizons. In periods of high volatility, longer-tenor trades can provide more stability to borrowers, but during these times it may also be difficult for lenders to extend credit at longer horizons.