Finance and Economics Discussion Series: Accessible versions of figures for 2017-003

Bond Market Intermediation and the Role of Repo

Accessible version of figures


Figure 1: Trading and repo volume for Treasuries

Standardized trading and repo volumes are plotted from 2002 to 2016: They both start around value of -2 in 2002, and increases up to 2 in early 2008. Then both sharply decrease to around -1 by 2009, and then increase slightly to above zero by mid-2010, and decrease slowly to approximately 0.8 by end of the sample. The two lines move together, but the trading volume has a higher short term variation.

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Figure 2: SI box and global box for primary dealers.

Global box and SI box of U.S. Primary Dealers.
Panel A
Global box and SI box for 2 year Treasury notes are plotted from mid-2013 through late-2016. Global box line hovers near zero, whereas SI box line generally moves around in the positive region.
Panel B
Global box and SI box for 10 year Treasury notes are plotted from mid-2013 through late-2016. Global box line hovers near zero, whereas SI box line generally moves around in the positive region.

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Figure 3: Model Timeline

Timeline highlighting the 3 periods of the model. In period 0 dealers post bid/ask to their clients, in period 1 client orders are submitted and dealers fill orders and trade in interdealer market, in period 2 the asset uncertainty is realized and cash flows are distributed.

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Figure 4: Model Market Structure

Stylized figure of the model’s market structure: D stands for dealer in the middle of the figure, C stands for a dealer's client on the right of the dealer, and Sec Lender stands for the securities lender on the upper left corner. The dealer receives client long and sale orders $$Q_L$$ and $$Q_S$$, a fraction $$\phi_L$$ and $$\phi_S$$ are accompanied by repos and reverse repos, respectively. GC Market stands for general collateral market above the dealer, SI Market stands for specific issue collateral market on the left of the dealer, and Cash Market stands for the underlying asset market below the dealer. Upon receiving client orders, a dealer chooses how much collateral to source or deliver to the GC market $$(Q_R^G)$$ and the SI market $$(Q_R^S)$$, and how much to buy or sell in the cash market $$(Q_D)$$. Positive $$Q_R^G$$ or $$Q_R^S$$ means that the dealer is engaging in reverse repos. Positive $$Q_D$$ means that the dealer is buying the asset. Securities lenders supply SL assets to the SI market. Only the asset movements (either through outright purchases and sales or as repo collateral) are drawn. Straight arrows indicate outright sales, and curved arrows indicate repo collateral movements.

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Figure 5: Simple example

Stylized figure of the dealers optimal re balancing after receiving a client levered long or short order: These diagrams show the dealer's optimal solution in a simple case where W=0, the dealer starts with its optimal portfolio, $$\phi_L = \phi_S = 1$$, and clients either submit a levered long order (panel (a)) or a short order (panel (b)). D stands for dealer in the middle of the figure, C stands for a dealer's client on the right of the dealer. GC Market stands for general collateral market above the dealer, SI Market stands for specific issue collateral market on the left of the dealer, and Cash Market stands for the underlying asset market below the dealer. Dealers optimally choose how much collateral to source or deliver in the GC market, the SI market, and how much to buy or sell in the cash market. Only the asset movements (either through outright purchases and sales or as repo collateral) are drawn. Straight arrows indicate outright sales, and curved arrows indicate repo collateral movements. g stands for $$g(Q_L)$$ in panel (a) and $$g(Q_S)$$ in panel (b). In panel (a) dealers buy $$Q_L$$ from the cash market, deliver $$Q_L + D – g$$ to the SI market, and deliver $$g-D$$ to the GC market. In panel (b) dealers sell $$Q_S$$ from the cash market, source $$Q_S + g–D$$ from the SI market, and deliver $$g-D$$ to the GC market.

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Figure 6: Client short with restricted balance sheet when W=0

Stylized figure of a dealer’s balance sheet when intermediating a client short The figure shows two dealers balance sheets when intermediating client orders of size Q. On the left a dealer intermediates a relatively small client order. On the asset side the dealer has it’s optimal risk adjusted return portfolio (SR) and the SI market reverse repos it invests in: $$g(Q) + Q – SR$$. On the liability side the dealer issued a repo to its client of size Q and issues g(Q) repos to the GC market. On the right a dealer intermediates a relatively large client order. On the asset side the dealer has it’s optimal risk adjusted return portfolio (SR) and the SI market reverse repos it invests in: $$g(Q+\epsilon) + Q \epsilon – SR$$. On the liability side the dealer issued a repo to its client of size $$Q + \epsilon$$ and issues $$g(Q+ \epsilon)$$ repos to the GC market. In this figure, the dealer’s intermediation is capped by $$Q+ \epsilon \leq \overline{Q}^S$$.

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Figure 7: Client long with restricted balance sheet when $$ Q<\overline {Q}^L_1$$ and W=0

Stylized figure of a dealer’s balance sheet when intermediating a client levered long maintaining its optimal portfolio. The figure shows two dealers balance sheets when intermediating client orders of size Q. On the left a dealer intermediates a relatively small client order. On the asset side the dealer has its optimal risk adjusted return portfolio (SR) and the reverse repo is invested in with its client of size Q. On the liability side the dealer issued a repo $$SR + Q – g(Q) $$ to the SI repo market and issues g(Q) repos to the GC market. On the right a dealer intermediates a relatively large client order. On the asset side the dealer has its optimal risk adjusted return portfolio (SR) and the reverse repo is invested in with its client of size $$Q + \epsilon$$. On the liability side the dealer issued a repo $$SR + Q + \epsilon – g(Q + \epsilon)$$ to the SI repo market and issues $$g(Q+ \epsilon)$$ repos to the GC market. In this figure, the dealer’s is able to maintain its optimal portfolio only up to $$Q+ \epsilon \leq \overline{Q}^L_1$$.

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Figure 8: Client long with restricted balance sheet when $$ \overline {Q}^L_1 = Q<\overline {Q}^L_2$$ and W=0

Stylized figure of a dealer’s balance sheet when intermediating a client levered long altering its optimal portfolio. The figure shows two dealers balance sheets when intermediating client orders of size Q. On the left a dealer intermediates a client order of size $$\overline{Q}^L_1$$. On the asset side the dealer has its optimal risk adjusted return portfolio (SR) and the reverse repo is invested in with its client of size $$\overline{Q}^L_1$$. On the liability side the dealer issued a repo $$SR + \overline{Q}^L_1 – g(\overline{Q}^L_1)$$ to the SI repo market and issues $$g(\overline{Q}^L_1)$$ repos to the GC market. On the right a dealer intermediates a larger client order $$\overline{Q}^L_1 + \epsilon$$. On the asset side the dealer alters its optimal risk adjusted return portfolio $$(SR) - \epsilon$$ and the reverse repo is invested in with its client of size $$\overline{Q}^L_1 + \epsilon$$. On the liability side the dealer issued a repo $$SR + \overline{Q}^L_1 + \epsilon – g(\overline{Q}^L_1 + \epsilon)$$ to the SI repo market and issues $$g(\overline{Q}^L_1 + \epsilon)$$ repos to the GC market. In this figure, the dealer’s intermediation is capped by $$\overline{Q}^L_1 + \epsilon \leq \overline{Q}^L_2$$.

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