Treasury TBAC presentation outlines potential of DLT, intraday repo. But will lenders show up?

Would you lend $1 billion for three hours to earn $1,200? That is roughly the proposition intraday repo makes to cash lenders, based on pricing cited in a presentation this week to the Treasury Borrowing Advisory Committee (TBAC), the panel of buy and sell side firms that advises the Treasury. Estimates of the market size ranged from $100 billion, derived from potential reduced bank reserve buffers, to $385 billion based on pre 2008 Fed overdrafts. At the upper end, the $2.1 trillion in collateral held by banks represents a theoretical ceiling. The presentation was guarded, noting that widespread adoption is “likely years away”. The bigger question it left open is whether lenders have sufficient reason to show up at all.

Incentives matter in any market. Mainstream repo involves those with excess cash, such as money market funds and stablecoin issuers, lending money overnight to hedge funds, dealers and banks, with the borrower providing collateral, often Treasuries. For intraday repo to gain traction, both sides need to be motivated, and the presentation leaned towards borrowers. It provided a stylized example where a typical bank might be able to eliminate its intraday reserve buffer of $20 billion if instead it could borrow via intraday repo. Reducing the cost of bank intraday liquidity is a concrete motivation.

Lenders’ incentives are less solid. The presentation suggests that in the early stages of intraday repo, lenders will primarily be motivated to deploy idle cash ahead of the overnight repo window. For example, a money market fund or stablecoin issuer receives an inflow of cash that it would like to park for a few hours. The reality is they would not be compensated that handsomely, with the presentation noting a rate of 30 to 40 basis points based on limited early transactions. This revenue is additive, given the lender plans to invest overnight anyway.

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