The rise of non-bank players in the repo market has come as new rules make the decades-old business less attractive for banks. It marks an evolution of financial markets since the 2008 global financial crisis, which has seen the withdrawal of banks from certain markets and activities where they were once the main actors.
Hedge funds including Och-Ziff and Moore Capital have begun beefing up their repo business, according to people familiar with the matter.
The shadow banking system, which encompasses less-regulated financial companies such as hedge funds and asset managers, has grown in size since the crisis, as banks shrink their balance sheets under more regulatory scrutiny. One hedge fund manager said that providing repo financing was “part and parcel of [a trend of] increasing participation of the buyside in traditional sell-side spaces”. Another person added that lending out assets or extending credit may be a way for funds to generate profits at a time when interest rates are still at historic lows. Still others expressed doubt that hedge funds would find repo financing a profitable venture.
Banks have traditionally offered repo services as an add-on to other businesses that generate more fees. Hedge funds also tend to have a higher cost of funding than banks, which may make it difficult for them to compete.
Some repo experts also pushed back on the notion that having less-regulated entities in the repo space would make the financial system riskier. They argue that having a variety of repo providers could help distribute risk away from banks, while electronic platforms could make it easier for regulators to keep track of the murky market.
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