This flatter term structure is partially a result of a flatter SONIA curve. The fall from the previous two quarters marks the cost that Brexit had placed on the funding market, which has to some extent masked the trend of repo becoming more expensive due to a reduction in balance sheet. If the cross-currency basis continues to be unfavourable to the UK, then this will further move the somewhat ‘sticky’ balance sheet to jurisdictions where a higher return on equity can be obtained.
As mentioned in the previous quarterly update, there is also more demand coming from the US and Canada where, even without the favourable cross-currency basis, investors are willing to pay higher repo spreads. Another factor is the capital treatment of each bank. If a client has a high capital intensity (bilateral swaps, less liquid CSAs etc), this has an impact on the availability of balance sheet for that client. As with most asset classes, it is rare for funding liquidity to be denied fully, but its pricing point can rise in order to manage the balance sheet usage.
Banks can also differ in their approach to repo, particularly where ringfencing is involved. One approach is the ‘match’ approach – in this case the outright level of repo funding is largely irrelevant, as the focus here is on the spread achieved between their cost of funding and where they supply it to clients. Another approach is using a Treasury function – in this case the absolute level of funding is hugely relevant, as repo funding is merely one weapon in their arsenal to obtain the best returns. If other asset classes offer healthier returns, then allocations will shift, thus lowering total balance sheet availability.