To Avoid Repo Crisis Fed Will Flood Market With A Gargantuan $500 Billion In Year-End Liquidity


According to the statement, the NY Fed will continue to offer two-week term repo operations twice per week, four of which span year end…

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  1. Might this extraordinary move encourage more risk taking on Wall Street? Oh yes, big time. Hedge Funds for instance use the repo market to gain leverage, which allows them to juice up returns.

    Under the hood of hedge fund leverage

    “Repurchase agreements, or repos, are also a common way for hedge funds to gain additional leverage. When a hedge fund enters a repo agreement, the hedge fund sells a security it owns to a repo counterparty (normally a prime broker), receiving cash and promising to repurchase that same security at a fixed price on a future date from the counterparty. By doing this, the hedge fund obtains exposure to the position while retaining the ability to use the cash for other investments during the term of the repo. When the repo expires, the counterparties either have to enter into another contract to continue to finance the security or the hedge fund pays for the security. Because of the complexity of these arrangements, cash management is critical to the hedge fund. On the balance sheet, the amount that a hedge fund has financed through repos is also shown in the liability section. The cost of these agreements to the fund is not as transparent as other forms of explicit leverage because the prime brokers make money on the spread between the purchase and sale price on the security in the contract.”

    So what does this mean and why is the Fed injecting so much liquidity into the market? Look below, this’ll help explain why there is so much fear at the Federal Reserve:

    The Next LTCM? $8 Billion Hedge Fund Is Using 10x Leverage
    Mon, 02/25/2019

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