Maximizing the Flexibility of Your Cash

Facing rising interest rates, inflationary pressure and a potential recession, the global economy is heading in an uncertain direction. Attempting to combat high inflation, the Fed has raised U.S. interest rates six times so far in 2022, with a projected federal funds rate between 4% and 4.5% by the end of 2022 and 4.6% by the end of 2023  ̶  a dramatic increase from earlier projections.^{1 2 3}

Although the economy has not yet realized the full effects of the recent interest rate hikes, investors are searching for security while minimizing losses as they face widespread market uncertainty and volatility. When interest rates rise, institutional investors typically turn to cash as a haven. Ultra-short-term investment vehicles  ̶  such as money market funds, certificates of deposit and Treasury bills  ̶  are effective solutions because they are safe and liquid.

Another vehicle that offers investors a flexible, short-term cash management investment option is a repurchase agreement, commonly referred to as a repo. One type of repo, the Fixed Income Clearing Corp (FICC) Sponsored Repo, has gained traction in recent years because it offers reduced counterparty risk, access to deeper and more stable pools of liquidity and operational efficiencies.  

The inherent flexibility of repo agreements is appealing to institutional investors. As they are collateralized investments with short-term or even overnight maturities, it is easy to manage changes in day-over-day cash balances while insulating investors from interest rate risk, especially in a rising rate environment. The overnight repo rate generally pays a rate in line with the lower end of the federal funds rate target range.

As cash positions grow, investors want to optimize their positions without sacrificing performance, adding administrative burdens or increasing credit and counterparty exposure. It makes sense that, in the repo markets, FICC Sponsored Repo attracts investors across a wide spectrum of investor types. Although FICC Repo agreements have been available since 2005, demand has grown significantly since 2017 when FICC expanded its rules to allow qualified institutional buyers to be sponsored into its marketplace.⁴ As of the end of 2021, the average daily trading volume of FICC Sponsored Repo transactions was more than $300B.⁵

Some of the key benefits that set FICC Sponsored Repos apart from other types of repo include increased efficiency, operational ease, improved liquidity and safety.

Increased efficiency and operational ease: The full service FICC member that sponsors a client at FICC acts as their client’s processing agent - handling the full trading lifecycle including collateral safekeeping, fulfilling the sponsored client’s margin obligations to FICC and satisfying other FICC obligations on behalf of the client.

Deep liquidity: By participating in FICC, the sponsored client has access to the liquidity of the entire FICC – representing a much deeper and more stable source of liquidity compared to traditional (e.g. bilateral) repo markets. This value manifests itself not only as capacity to sponsored clients but also as flexibility to sponsored clients (e.g. they can change balances day over day).

Improved safety:  The sponsored client’s counterparty on all FICC Repo trades is the AAA-rated FICC, a subsidiary of the Depository Trust & Clearing Corporation.

Interest rates hikes are likely to continue in 2023, deepening the need for institutional investors to optimize their cash holdings in safe, operationally efficient and flexible solutions. Although the trajectory of U.S. interest rates is known, the pace of rate increases is far from certain.

FICC Sponsored Repo offers investors a stable liquidity solution at attractive yields while minimizing credit or interest rate risk.

¹ Federal Reserve raises interest rates another 75 basis points, second time in 2 months | Pensions & Investments (pionline.com)
² Fed Raises Interest Rates by 0.75 Percentage Point for Third Straight Meeting - WSJ
³ Federal Reserve Hikes by 0.75 Point, Signals Slower Increases but Ultimately Higher Rates - WSJ
⁴ SFM Interview: Northern Trust on FICC sponsored repo liquidity distribution – Finadium
⁵ FICC credit and market data as of 31 December 2021, amounts shown in USD.