Repos a Deep Dive in the Collateral Pool

Repos: A Deep Dive in the Collateral Pool

Macro Credit Research August 1, 2012

www.fitchratings.com

Analysts Macro Credit ResearchMartin Hansen+1 212 [email protected]

Robert Grossman+1 212 [email protected]

Kevin D’Albert+1 212 908-0823kevin.d’[email protected]

Fund and Asset Manager GroupViktoria Baklanova+1 212 [email protected]

• U.S. Money Fund Exposure and European Banks: Eurozone Hits Fresh Low, July 26, 2012

• Repo Emerges from the “Shadow,” Feb. 3, 2012

Related Research

Research HighlightsSample based on 10-largest prime money market funds.

Repo collateral by asset class (% share of total collateral)

• Treasurys and Agencies ........... 65%

• Structured Finance ................. 18% (see table at right)

• Corporate Debt and Equities .... 15%

Corporate and equity issuers (% of corporate debt and equity collateral pool)

• SPDR Gold ........................... 7.0%

• Westpac ............................... 1.4%

• Verisign ................................ 1.4%

Repos in the Spotlight: Repurchase agreements (repos), a core part of the “shadow banking” system, are increasingly in the spotlight, given both their importance as a funding mechanism and their role in past episodes of market distress. This study updates Fitch Ratings’ earlier report, “Repo Emerges from the ‘Shadow,’” dated Feb. 3, 2012, which highlighted the post-financial crisis resurgence in the use of structured finance collateral within triparty repo markets. As revealed through Fitch’s analysis of the 10 largest U.S. prime money market funds’ (MMFs) disclosures, structured finance repos are typically collateralized by pools of securities that are of lower credit quality (e.g. ‘CCC’ and below), deeply discounted, and small in size. Additionally, while Treasurys and agencies represent a significant majority of collateral, repos are also used to finance corporate debt, gold, and equity securities. Funding relatively less liquid, more volatile assets through repos (which are effectively short-term loans) creates potential liquidity risks for both repo borrowers and the underlying assets.

Focus on Structured Finance: Triparty markets are used to finance roughly $90 billion of structured finance securities, based on estimates from Federal Reserve Bank of New York (FRBNY) data (see table, Structured Finance Repo Collateral: A Drill-Down). As context, average daily trading volumes for non-agency residential mortgage-backed securities (RMBS) and asset-backed securities (ABS) combined is about $6 billion, according to SIFMA. Fitch’s sample, which captures $21.2 billion or almost one quarter of the structured finance securities funded through triparty repo, reveals the potential liquidity risks inherent in much of this collateral. These liquidity risks stem from both the small size of many of these securities, whose median value is about $800,000, and their distressed nature. For example, roughly 50% of this sample consists of legacy CDOs and subprime and Alt-A RMBS, much of which was originated by financial institutions that experienced severe distress related to their securitization and mortgage-related exposures during the U.S. credit crisis. Approximately 60% of structured finance repos within Fitch’s sample were conducted with three institutions: Credit Suisse, Royal Bank of Scotland, and Bank of America (Merrill Lynch). Interestingly, each of these institutions has been active in the FRBNY’s “Maiden Lane” auctions of crisis-era RMBS and CDOs.

Funding Risks: Structured finance repo yields averaged 72 bps as of end-February, roughly four times greater than the 18 bps yields on repos backed by Treasury and agency securities. Structured finance repos provide a potentially attractive return opportunity for some money funds in the current low-yield environment. However, U.S. prime money market funds, which act as repo lenders within the U.S. triparty repo market, are

Structured Finance Repo Collateral: A Drill-Down (As of End-February 2012)Fitch Sample Size (Based on Top 10 U.S. Prime MMFs) ($ Bil.) 21.2N.Y. Fed Sample Size (Based on Entire Triparty Market) ($ Bil., Estimated) 90

Value of Individual Collateral Securities (Median, Rounded) ($) 800,000 Number of Securities Within Collateral Pool (Rounded) 4,200Repo yield (Structured Finance Collateral) (bps) 72 Repo yield (Treasury and Agency Collateral) (bps) 18 Haircut for Structured Finance Repo (Median) (%) 7.6Repo Leverage (Implied from Median Haircut) 14 to 1Subsectors of Interest (% of Structured Finance Collateral Pool)RMBS (Alt-A) 26RMBS (Subprime) 17CDO 6Top 3 Largest Issuers (% of Structured Finance Collateral Pool) 1. Countrywide 7.22. Credit Suisse 6.63. Royal Bank of Scotland 3.8Top 3 Largest Counterparties — Structured Finance Repos (% of Structured Finance Collateral Pool)1. Credit Suisse 302. Royal Bank of Scotland 193. Merrill Lynch (Bank of America) 13

Source: Fitch Ratings, Form N-MFP, Federal Reserve Bank of New York.

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684521





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short-term and highly risk-averse investors, as demonstrated by the severe decline in structured finance repo during the height of the U.S. financial crisis. Therefore, any disruption in repo funding for structured finance could impair the liquidity and valuation of these assets, affecting not only repo market participants but also cash investors that take long positions without the use of leverage. Such disruptions might also affect financial institution counterparties that use repo markets to fund inventory of structured finance and other riskier securities. As noted in the Financial Stability Oversight Council’s recently published 2012 Annual Report: “Some dealers remain very dependent on short-term repo funding and are heavily exposed to rollover risk. Of particular concern is the use of short-term borrowing to finance less-liquid collateral, such as asset-backed securities or corporate bonds.”

Triparty Repo: Leveraging the Available DataDespite the extensive interest in repo markets, data is relatively scarce. This study helps to fill that gap by analyzing disclosures of the 10 largest U.S. prime money funds. MMF disclosures provide the most detailed publicly available historical information on repo haircuts, pricing, collateral, and counterparties. Based on these disclosures, Fitch has been able to construct a time series of repo attributes back to end-2006, capturing trends before, during, and after the U.S. credit crisis (see pages 5 and 6 for Fitch time series data for both collateral mix and haircuts).

The recently developed SEC Form N-MFP is an unparalleled source of granular, security-level repo information, including issuers and valuations, enabling Fitch to take a more in-depth view of the collateral pool. This detailed analysis complements the aggregated, high-level data provided by the FRBNY, which offers a comprehensive summary of the triparty repo market as a whole (see table, U.S. Money Fund Disclosures and N.Y. Fed Data: Complementary Perspectives). Taken together, the greater transparency afforded by both FRBNY and MMF data sheds light on risk trends in the triparty market and offers a glimpse into the potentially larger, but more opaque, bilateral repo market.

This study is based on repo transaction information sourced from a sample of the 10 largest U.S. prime MMFs’ public disclosures. Fitch’s sample encompasses about $116 billion in repo transactions as of end-February 2012, which represents roughly 7% of the $1.76 trillion U.S. triparty repo market (see table, Triparty Repo: Comparing the Fitch and N.Y. Fed Samples). In terms of “nontraditional” or riskier collateral (i.e. structured finance, corporate debt securities, and equities), Fitch’s sample captures $40 billion in collateral, or 16% of the $248 billion financed in the triparty market. Much of the triparty collateral not reflected in Fitch’s sample consists of relatively smaller prime MMFs, MMFs that transact strictly in U.S. government securities as collateral (and, therefore, do not accept riskier forms of collateral), and securities lenders reinvesting cash proceeds, for which there is not publicly available data of comparable granularity.

Fitch constructed the repo dataset based on a variety of MMF disclosures. Fitch derived the historical time series (year-end 2006 through mid-year 2010) from quarterly, semiannual, and annual reports, but used the more recently developed Form N-MFP for subsequent periods. Importantly, there appear to be differences, in some cases significant, in how shareholder reports and Form N-MFP categorize the form of collateral. As a result, some of the changes between midyear 2010 and year-end 2010 observations could result from differences in reporting standards. Several methodological assumptions underlie this study and are detailed in the Appendix on page 6.

Structured Finance Repos: Thirst for Yield, Less Liquid CollateralFitch’s analysis of Form N-MFP, which captures roughly $21 billion in structured finance repo collateral, provides a detailed glimpse into the risk attributes of the roughly $90 billion of structured finance securities funded in the triparty repo market. First, the generally small size of these positions, which are typically pooled within a single repo, raises potential concerns about their liquidity during more stressed market conditions. As an indication of this high granularity, the median value of the more than 4,200 structured finance securities in Fitch’s sample is about $800,000, with almost a quarter less than $50,000 (see table, Structured Finance Repo Collateral: Smaller Positions Potentially Less Liquid). Smaller-sized tranches can make it difficult for potential investors to research and price these securities and, in turn, for existing holders to either fund or liquidate their positions.

U.S. Money Fund Disclosures and N.Y. Fed Data: Complementary Perspectives

Fitch Sample of 10 Largest Prime

Money FundsFederal Reserve

Bank of New YorkCoverage of Triparty Market (as of End-February 2012) 7% 100%Beginning of Time Series End 2006 May 2010Frequency of Available Data Monthlya MonthlyCollateral (by Broad Sector) Yes YesCollateral (Security Level/Issuer) Yes NoCollateral (by Subsector/Industry) Yes NoCollateral Security Value Yes NoHaircuts (by Collateral Type) Yes YesRepo pricing (i.e. Transaction Level) Yes NoRepo Maturity Yes NoCounterparty (by Institution) Yes NoaForm N-MFP has been available on a monthly basis (with a two month lag) since November 2010. Prior to that period, detailed information was available on a quarterly basis for each fund. Fitch’s time series is based on select periods and does not include each month. Source: Fitch Ratings, Form N-MFP, MMF financial statements, Federal Reserve Bank of New York.

Triparty Repo: Comparing the Fitch and N.Y. Fed Samples($ Bil., As of End-February 2012)

Fitch Sample of 10 Largest Prime

Money FundsFederal Reserve

Bank of New YorkStructured Finance 21 91Corporate (Debt) 12 78Equities 6 79Total “Risky” Collateral 40 248Treasury 20 579Agency 56 907Total Treasury and Agency 75 1,485Other 1 26Total Collateral 116 1,759

Source: Fitch Ratings, Federal Reserve Bank of New York, Form N-MFP.

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Additionally, structured finance collateral tends to be of low credit quality. Many of these securities are lowly rated, have long tenors, and are deeply discounted as illustrated by three securities that are broadly representative of the structured finance collateral within Fitch’s repo sample (see table, Structured Finance Repo Collateral Tends to Be Deeply Discounted, Low Credit Quality). For example, as a rough measure of their valuation, the ratio of the security value to the principal amount for these three securities ranges from 0.15 (essentially, 15 cents on the dollar) to 0.71 (essentially, 71 cents on the dollar). These securities are all rated ‘CCC’ (or an equivalent rating) or below.

Another illustration of the distressed nature of much of this collateral is that more than three-quarters of the structured finance pool consists of RMBS, much of which is backed by legacy subprime and Alt-A loans (see table, Structured Finance Repo Collateral — Half of Pool is Alt-A, Subprime, and CDO). Additionally, several of the largest issuers of the structured finance collateral in Fitch’s sample were financial institutions that experienced severe distress related to their

securitization and mortgage-related exposures (see table, Structured Finance Repo Collateral — Some Legacy Names Among Top Issuers).

Since Fitch’s sample represents about one-quarter of all structured finance collateral within triparty repo, it is unclear whether this analysis also accurately describes the risk profile of the remaining 75% of structured finance securities funded through this market. FRBNY data for ABS and private label CMO combined both investment and non-investment-grade securities into single categories from mid-2011, making it difficult to determine whether these attributes apply to the broader pool of structured finance repos.

For MMFs (which act as lenders in the triparty repo market), repos backed by structured finance securities generate markedly higher returns than repos on traditional forms of collateral, a potentially significant motivation in the current low yield environment. Median yields on repos backed by structured finance collateral (72 bps) were four-times higher than Treasury and agency repo yields (18 bps) as of end-February (see table, Structured Finance Repos Generate Higher Yields). While part of this yield differential likely stems from the relatively longer maturities of structured finance repos, it is likely also a reflection of the incremental risks associated with this lower quality form of collateral. Fitch’s understanding is that MMFs generally make a binary “yes/no” decision about whether to transact with a specific counterparty and, therefore, focus their repo activities on financial institutions that they would otherwise lend to on an unsecured basis. From this perspective, MMFs view repo collateral, even if of lower credit quality, as an additional measure of security in their counterparty management.

Structured Finance Repo Collateral: Smaller Positions Potentially Less LiquidValue of Security (Range) No. of Securities % of Total Pool<$50,000 928 22$50,001 to $1,000,000 1,322 31$1,000,001 to $10,000,000 1,646 39>$10,000,000 329 8Total Securities 4,225 100Total Value of Pool $21.2 BillionTotal Value of Pool (Security-Level Details) $14.3 BillionMean Value $3.4 MillionMedian Value (Rounded) $800,000

Note: Above analysis is based on the portion of the roughly $14.3 billion in structured finance collateral that is identified at a security-level in the N-MFPs. This analysis does not consider the roughly $7 billion in structured finance collateral for which security-level details are not provided in the N-MFP.Source: Fitch Ratings, Form N-MFP.

Structured Finance Repo Collateral Tends to Be Deeply-Discounted, Low Credit Quality

Security MaturityValue

($)Principal

($)

Ratio of Value/

Principal

Rated CCC

(or Equivalent)

or Below?WAMU 2006-AR10 1A1 09/25/36 6,801,157 9,554,349 0.71 YesSASCO 2004-21XS 1M1 12/25/34 799,524 3,945,084 0.20 YesJPMAC 2007-CH5 M1 05/25/37 1,203,966 7,800,000 0.15 Yes

Source: Fitch Ratings, Form N-MFP, Bloomberg.

Structured Finance Repo Collateral — Half of Pool is Alt-A, Subprime, and CDOSector % of Structured Finance Repo Collateral PoolRMBS 76 RMBS — Alt-A 26 RMBS — SUBPRIME 17 RMBS — PRIME 7 RMBS — Various 27ABS 5CMBS 12CDO 6 CDO — SF 1 CDO — Various 5

Source: Fitch Ratings, Form N-MFP, Bloomberg.

Structured Finance Repo Collateral — Some Legacy Names Among Top IssuersIssuer (Structured Finance) % of Structured Finance Repo CollateralCountrywide 7.2Credit Suisse 6.6Royal Bank of Scotland 3.8Bear Stearns 3.4Bank of America 3.3JPMorgan Chase 3.0GMAC 2.9Morgan Stanley 2.3Washington Mutual 2.3Lehman 2.3Deutsche Bank 1.7Citigroup 1.6Goldman Sachs 1.4Indymac 1.2Merrill Lynch 1.2Santander UK 0.9UBS 0.9Wachovia 0.8CIT 0.8Wells Fargo 0.7

Source: Fitch Ratings, Form N-MFP.

Structured Finance Repos Generate Higher Yields

Yield (Median)

Haircut (Median)

(%)

Implied Leverage

(x)Structured Finance 0.72 7.6 14Agencies (U.S.) 0.18 2.3 44Treasury (U.S.) 0.18 2.0 51


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For securities dealers (which act as borrowers in the triparty repo market), repos provide a source of leverage and cost-effective funding for their inventory of structured finance securities. While median repo haircuts for structured finance collateral have increased from about 5% at end-August 2011 to 7.6% as of end-February 2012, this higher haircut still implies roughly 14:1 leverage, meaning that a dealer can finance $14 of securities with $1 of invested capital. Additionally, repos provide financial institutions with a relatively low-cost form of financing for their structured finance holdings, particularly in light of the low credit quality, small size, and longer-tenor of many of these securities.

As of end-February, five financial institution counterparties — Credit Suisse, Royal Bank of Scotland, Bank of America (Merrill Lynch), Citibank, and Barclays — together accounted for almost 80% of all structured finance repo borrowing within Fitch’s sample (see table, Structured Finance Repo — Largest Counterparties). Credit Suisse, which was not among the five largest counterparties as of end-August 2011, accounted for roughly 30% of all structured finance repos as of end-February. This emergence at the top of the list seems consistent with Credit Suisse’s activity in the “Maiden Lane” auctions of structured finance securities that the FRBNY has acquired as part of its crisis-era interventions with Bear Stearns and AIG. Interestingly, each of the top five counterparties was at some stage this year one of the winning bidders of a “Maiden Lane” auction, an occurrence that might indicate repos are used to fund these securities.

Equity and Corporate Debt Repos: Gold, Tech, and Financials at the TopThe equity and corporate debt repo collateral in Fitch’s study includes a wide mix of names, with more than 1,500 total unique issuers within the combined pool as of end-February 2012. Much of this collateral consists of securities issued by large, well-established companies, whose obligations trade actively in secondary markets. However, as illustrated by the sheer number of names represented within this sample, the securities of smaller and medium-sized companies are also financed through triparty repo.

Notably, the repo collateral sample includes some lower quality names, including issuers that have either defaulted or experienced severe credit distress during the past few years. While not generally representative of the credit quality of the sample as a whole, examples of names appearing within the corporate debt pool are AMBAC, Lehman Brothers, and Sino Forest (see table, Corporate Debt and Equity Collateral: Mix of Names, Some Low Quality).

A notable change since Fitch’s prior study is the presence of several technology-related companies among the largest names within the corporate debt and equity collateral pool. Nine of the 20 largest

issuers are tech companies, an indication of more active trading and investor interest in the sector (see table, Corporate and Equity Repo Collateral — Gold, Tech, and Financials). The largest single name is gold exchange traded funds, an asset class that has also been a focal point for many investors.

Five of the 20 largest issuers are financial services names, creating potential “wrong-way” risks in which the same risk factors affect the financial performance of both the collateral issuer and the financial institution counterparty. This correlation between the creditworthiness of the counterparty and the value of the collateral could reduce recoveries in the event of a counterparty failure. The presence of structured finance repo collateral likely exacerbates this risk given its correlation with the performance of financial institutions.

The presence of gold, tech companies, and financials — sectors which have been the subject of ongoing market interest — reflects the important role that repo markets play in providing liquidity to trading-oriented investors. For example, hedge fund positions that are financed through bilateral repos might, in turn, be financed in the triparty market by their dealer and prime brokerage counterparties.

Collateral, Counterparty, and Haircut TrendsOver the past several observation periods, the collateral mix within Fitch’s sample has remained relatively stable with a few notable exceptions. In the six-month period between end-August 2011 and end-February 2012, Treasurys increased from 5% of the overall

Structured Finance Repo — Largest Counterparties (Repo Borrowers)(% of Total Structured Finance Collateral)

End-August 2011 End-February 2012Bank of America/MerrillLynch 27 Credit Suisse 30Royal Bank of Scotland 23 Royal Bank of Scotland 19Barclays 22 Bank of America/Merrill Lynch 13Citibank 9 Citibank 7JPMorgan Chase 7 Barclays 7Top Five (Aggregate) 87 Top Five (Aggregate) 77


Corporate Debt and Equity Collateral: Mix of Names, Some Low Quality

Security MaturityCoupon

(%)Value

($) Principal($)

Ratio of Value/

PrincipalAMBAC Financial Group 12/05/35 5.95 1,951,756 13,472,000 0.14Lehman Brothers Holdings 01/24/13 5.63 6,869,424 25,093,788 0.27Sino Forest 10/21/17 6.25 1,052,333 3,075,000 0.34


Corporate and Equity Repo Collateral — Gold, Tech, and FinancialsIssuer % of Corporate and Equity Repo Collateral PoolSPDR Gold 7.0Westpac 1.4Verisign 1.4General Electric 1.4Bank of America 1.3Micron Technology 1.3Virgin Media 1.3Netapp 1.3Lehman 1.2Hartford 1.2General Motors 1.2Citigroup 1.1Cadence Design 1.0Microchip Technology 0.9Novellus 0.9Hologic 0.8Xilinx 0.8Biomarin 0.8BorgWarner 0.8Ford 0.8

Note: Above analysis is based on the portion of the roughly $11 billion in corporate debt and equity collateral that is identified at a security-level in the N-MFPs. Source: Fitch Ratings, Form N-MFP.

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repo collateral mix to 17%. On a combined basis, Treasurys and agencies, which represented roughly half of the repo collateral pool in end-August, increased to roughly two-thirds of the pool as of end-February. Over this same period, the share of equities and corporates both declined, while structured finance remained relatively stable at 18% of the pool. Interestingly, on a dollar basis, the amount of structured finance repo collateral within Fitch’s sample increased by about 10% over this period (from $19 billion as of end-August to $21 billion as of end-February) given that Fitch’s total repo collateral pool increased from roughly $93 billion to $116 billion over this period.

A relatively small number of financial institutions tend to dominate repo trading, although there has been a mild decrease in counterparty concentrations of late (see table, Concentrations in Largest Counterparties Declines from Crisis Peak). As of the end of 2008, the five largest counterparties accounted for more than 80% of all repo trading in Fitch’s sample. Since then, the top five’s share of repo activity has declined steadily and, as of end-February, accounted for roughly 50% of all trading. In terms of the largest individual counterparties, seven institutions were among the top 10 as of both end-August 2011 and end-February 2012 (see table, Largest Counterparties Relatively Stable, with Some Shifts). Over this period, notable changes include the rise of Credit Suisse as the largest repo counterparty; a moderate decline in the shares of activity by Bank of America/Merrill Lynch, Barclays, JPMorgan Chase, and Deutsche Bank; and the entry of Goldman Sachs, Mizuho, and Royal Bank of Canada within the top 10. Interestingly, as of end February, only one euro zone institution, Deutsche Bank, remains among the 10 largest counterparties.

Another notable trend is that median haircuts on repos backed by riskier forms of collateral have increased moderately since end-August 2011 (see table, Moderate Increase in Haircuts on Riskier Collateral). Over the six-month period between end-August 2011 and end-February 2012, median haircuts for repos collateralized by corporate debt securities increased from 5% (or 21:1 leverage) to 7% (or 15:1 leverage). Over this same period, median haircuts on structured finance repos increased from 5% (or 21:1 leverage) to 7.6% (or 14:1 leverage).

This increase in haircuts could indicate greater conservatism by repo lenders, since higher haircuts imply a larger buffer against potential

price volatility and a deleveraging for repo borrowers. However, it is important to note that the price declines already experienced by deeply discounted legacy structured finance collateral significantly exceed haircut levels. As a hypothetical example, for a pool of structured finance securities that on average is valued at 45 cents on the dollar, the realized 55% decline in value is several multiples

Repo Collateral Mix(% of Fitch Sample)

Period Treasury AgencyTreasury

and Agency CorporateStructured

Finance Equity

Unallocated “Riskier” Collateral CP

Mixed Various

“Riskier” collateral Total

2H 2006 0 38 38 36 18 2 0 1 6 62 1001H 2007 0 32 33 23 33 5 0 6 0 67 1002H 2007 17 32 49 20 24 2 0 2 3 51 1001H 2008 0 41 41 27 11 14 0 1 6 59 1002H 2008 9 44 53 8 5 31 3 1 0 47 1001H 2009 13 43 57 9 0 19 12 3 0 43 1002H 2009 13 40 54 13 4 14 8 3 4 46 1001H 2010 10 45 56 22 4 10 8 1 0 44 1002H 2010 16 28 45 11 13 21 7 2 1 55 100Aug. 2011 5 47 52 17 21 10 N.A. 1 0 48 100Dec. 2011 23 37 60 14 19 6 N.A. 0 0 40 100Jan. 2012 18 44 63 12 19 5 N.A. 1 0 37 100Feb. 2012 17 48 65 10 18 5 N.A. 1 0 35 100

N.A. – Not applicable, as all nontraditional collateral is allocable due to form N-MFP. Source: Fitch Ratings, Form N-MFP, and MMF financial statements.

Largest Counterparties Relatively Stable, with Some Shifts(% of Total Repo Collateral)

End-August 2011 End-February 2012Bank of America/Merrill Lynch 17 Credit Suisse 12Barclays 15 Bank of America/Merrill Lynch 11JPMorgan Chase 13 Barclays 11Deutsche Bank 10 Royal Bank of Scotland 9Royal Bank of Scotland 7 JPMorgan Chase 8Credit Suisse 5 Deutsche Bank 7BNP Paribas 4 Goldman Sachs 5Wells Fargo 4 Mizuho 5Citibank 4 Citibank 5ING 4 Royal Bank of Canada 4Top Five (Aggregate) 61 Top Five (Aggregate) 52Top 10 (Aggregate) 82 Top 10 (Aggregate) 78


0

20

40

60

80

100

10 Largest Repo CounterpartiesFive Largest Repo Counterparties

Source: Fitch Ratings, Form N-MFP, and MMF financial statements.

(% of Total Repo Activity)

Concentration in Largest Counterparties Declines from Crisis Peak

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higher than the median haircut of 7.6%. Put differently, a 7.6% buffer on a security valued at 45 cents on the dollar would cover a valuation decline of roughly 3 cents on the dollar (i.e. with the security now pricing at 42 cents on the dollar). Given the relatively lower liquidity of much of this collateral, it is unclear whether these haircut levels would fully cover the bid-ask spreads for structured finance collateral, particularly under stressed market conditions.

Moderate Increase in Haircuts on Riskier Collateral

PeriodTreasury (Median)

Agency (Median)

Corporate (Median)

Structured Finance

(Median)Equity

(Median)2H 2006 N.A. 2.0 3.0 4.5 5.01H 2007 2.0 3.0 3.0 4.2 5.02H 2007 3.0 3.0 3.2 5.0 5.01H 2008 2.0 2.8 5.0 5.0 5.02H 2008 2.0 2.0 5.0 3.5 10.01H 2009 2.0 2.5 5.0 N.A. 10.02H 2009 2.0 2.4 6.8 6.9 8.11H 2010 2.0 3.0 7.7 8.0 8.02H 2010 2.0 2.5 6.2 8.0 8.0Aug. 2011 2.0 2.3 5.0 5.0 8.0Feb. 2012 2.0 2.3 7.0 7.6 8.0

N.A. – Not applicable (i.e. no collateral of that type within Fitch’s sample). Source: Fitch Ratings, Form N-MFP, and MMF financial statements.

Background on Fitch Study• This research study is intended to provide market participants with information on triparty repo markets. Although it is based on

MMF financial statements, the study does not comment specifically on Fitch-rated funds. This report does not have any ratings implications at present.

• The sample set is based on public filings from the 10 largest prime institutional and retail MMFs, as measured by assets under management, as of each observation period. Therefore, in some cases, the MMFs sampled differ slightly from period to period. Because this analysis is based on aggregated data for the 10 MMFs sampled, it does not capture potential differences in repo activity across individual funds. To identify the 10 largest funds that make up Fitch’s sample, Fitch uses rankings of fund assets under management sourced from Crane Data LLC. Fitch sources all of the underlying repo data directly from MMF disclosures, not through a third-party data source.

• Repo collateral is classified into one of the following categories: Treasurys, agencies, corporates, equities, structured finance, commercial paper, and mixed pool/various. For certain periods, the disclosures of a fund in the sample did not provide information on the asset class of the collateral underlying its nongovernment repos.

• Agencies encompass both debt instruments issued directly by the U.S. government-sponsored enterprises (GSE) and mortgage-backed securities guaranteed by GSEs. Structured finance includes whole loans and collateral classified as “mortgage.” Commercial paper is primarily issued by corporate entities.

• Data for the more recent periods (i.e. end-2010 and after) is based on MMFs’ Form N-MFP, which generally provides security-level details for repo collateral. Historical data (i.e. end-2006 through mid-2010) is based on MMFs’ quarterly, semiannual, and annual reports, which in most cases provide sufficient data to both classify repo collateral by broad asset class and to calculate the corresponding haircuts.

• In some cases, however, the asset class information provided in the quarterly, semiannual, and annual reports is ambiguous. In particular, it is sometimes unclear whether collateral identified as “government securities” is Treasury or GSE securities. In these cases, Fitch has made a classification determination based on inference from other data points. For this reason, as compared with Fitch’s prior study, “Repo Emerges from the ‘Shadow’”, the relative mix of Treasury versus GSE securities has for some historical periods been revised in this study. However, the overall combined share of Treasurys and GSE securities together is largely unchanged.

• Additionally, analysis of the N-MFP shows the prevalence of mixed pools of collateral (i.e. in which securities from multiple asset classes collateralize a single repo transaction). Therefore, classifications provided in the quarterly, semiannual, and annual reports might in some instances reflect pools comprised of multiple asset classes.

• The period of observation covers nine distinct semiannual periods and month-end August 2011, December 2011, January 2012, and February 2012. Note that prior to 2011, financial reporting dates often varied across MMFs. Therefore, Fitch has applied a degree of judgment in categorizing individual MMF filings into the appropriate semiannual bucket within its historical time series. For the last observation period (Feb. 29, 2012), the repos in Fitch’s sample represent roughly $116 billion.

• Mixed pool/various includes both collateral instruments that do not fit into the other categories and pools of collateral that include multiple categories. A collateral pool is allocated to one of the categories whenever possible given the quality of disclosure, even if including some mixing across categories. For example, a pool consisting primarily of agencies, but also including some Treasurys, is typically designated as agency collateral.

7 August 1, 2012


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Repos a Deep Dive in the Collateral Pool

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