Yearly Archives: 2020

Central banks hold foreign currencies for a number of reasons, according to the World Economic Forum, including to ward off crises and to help facilitate international trade. The Bretton Woods system collapsed when President Richard Nixon announced the abandonment of the gold standard in August 1971. But the dollar’s status as the indispensable global reserve currency endured. The idea of the federal government issuing paper money met with hard resistance. Some people feared, with good reason, that it would create a financial calamity.

Before the Civil War, the United States used gold and silver coins as its official currency. Paper currency in the form of banknotes was issued by privately owned banks, the notes being redeemable for specie at the bank’s office. Such notes had value only if the bank could be counted on to redeem them; if whats a pip in forex a bank failed, its notes became worthless. These were nominally payable in silver, but rapidly depreciated due to British counterfeiting and the Continental Congress’s difficulty in collecting money from the states. Before greenbacks, only gold and silver coins were legal tender in the United States.

The party opposed the deflationary lowering of prices paid to producers that was entailed by a return to a bullion-based monetary system, the policy favored by the Republican and Democratic parties. Continued use of unbacked currency, it was believed, would better foster business and assist farmers by raising prices and making debts easier to pay. Over time, the greenback evolved and became the primary form of currency used in daily transactions in the United States. Its significance extended beyond the borders of the country, with the dollar gaining recognition as a global reserve currency. Today, the greenback plays an essential role in international trade, foreign exchange markets, and global financial transactions.

Already, the dollar is poised to “catch down” to the decline in Treasury yields, which have fallen sharply over the past month, said Steve Englander, global head of G-10 currency strategy at Standard Chartered, in a recent report for clients. The U.S. dollar appreciated sharply in 2022, bolstered by the Federal Reserve’s aggressive interest-rate hikes and a scramble for safety as stocks and bonds in markets around the world sold off in tandem. Seigniorage refers to stealth profits that governments reap from issuing currencies. As a result, the dollar has been the worst-performing G-10 currency over the past month, according to a team of analysts at Rabobank. As was typical during the Civil War, skilled workers and advanced machines tended to be in the North, and that was true of the engravers and high-quality printing presses needed to print currency. As the bills printed in the South tended to be of low quality, it was easier to make facsimiles of them.

The Federal Reserve Act established our modern purely fiat monetary system of currency backed by faith in the government rather than gold. The advantages of flexibility and stimulus spending won out over the disadvantages of inflation. At the start https://g-markets.net/ of the war in 1861, a dollar could buy a certain amount of goods. But by 1864, rampant inflation meant that the same dollar could only purchase half as much. For example, prices for commodities like corn nearly doubled from 1860 to 1865.

Notes came to be called, the Union government was able to increase the money supply without relying on its dwindling gold reserves. While they caused inflation, greenbacks allowed the North to mobilize the industry and troops needed to win the war. While modern U.S. banknotes are commonly called greenbacks in slang, the original greenback dollars issued during the Civil War have an enduring legacy and value.

This is a fascinating history of the paper currency of the United States and how the term greenback originated. I still hear people refer to paper money as greenbacks today, and now I know this word has more history than simply the color of our money. Legal Tender “greenbacks” were not backed by coin until Republican president Rutherford B. Hayes backed the 1875 Specie Resumption Act in 1875. After the Civil War, creditors were still clamoring for coin-backed currency, and the United States returned to the gold standard in 1879. Some Americans were furious with the decision, and they formed the Greenback Labor Party, which called for a return to the issue of greenbacks and the regulation of certain corporations such as privately owned banks whom they feared would redefine the value of currency. Pressure began to build in the financial industry for a rectification of the weak currency situation.

1. For nearly 80 years, the US dollar has dominated international reserves and served as the main currency used in global trade.
2. Marvin Loh, a global strategist at State Street, told MarketWatch in a phone interview that State Street’s pricing-parity models show the greenback is still too expensive.
3. Trading the greenback can be done directly or indirectly, through currency pairs that are correlated with the US dollar.
4. Greenback movement, (c. 1868–88), in U.S. history, the campaign, largely by persons with agrarian interests, to maintain or increase the amount of paper money in circulation.

For instance, most global commodities are priced in US dollars, so a stronger greenback may reduce overseas demand and thus affect revenues and profitability of US resource producers. Manufacturing companies are hit especially hard by the rising dollar, as they have to compete in a global market and a domestic currency that is even 5% stronger can have a considerable impact on their competitiveness. Demand Notes got their name because they were payable “on demand,” – meaning the government had to pay the note’s face value in gold or silver coins if the holder asked. Congress debated solutions, eventually settling on printing paper money to pay for the war efforts. This came in two phases, the first being Demand Notes, which were redeemable for gold and printed with green ink on the back.

The first greenbacks were printed in 1862, after the passage of the Legal Tender Act, which President Abraham Lincoln signed into law on February 26, 1862. The new money also initiated debates about the proper anchor for the US monetary system that permeated national politics into the early 20th century. Frank Baum in the 1890s, can be read as an allegory regarding those debates with the yellow brick road representing gold, Dorothy’s slippers (in the book) representing silver, and the Emerald City representing greenbacks. The Bretton Woods Agreement at the end of World War II also established the buck as the primary currency of international trade, which is why futures contracts for commodities like crude oil and natural gas are almost always priced in dollars. For nearly 80 years, the US dollar has dominated international reserves and served as the main currency used in global trade. The Legal Tender Act was passed on 25 February 1862, which permitted the Secretary of the Treasury to issue Legal Tender Notes, which looked very similar to the Demand Notes they replaced, only they were not redeemable for coin.

What are Greenbacks?

Similarly, if the Federal Reserve (the US central bank) raises interest rates, this can also lead to an increase in the value of the dollar. The first measure to finance the war occurred in July 1861, when Congress authorized $50,000,000 (~$1.29 billion in 2022) in Demand Notes. They bore no interest but could be redeemed for specie “on demand.” Unlike state and some private banknotes, Demand Notes were printed on both sides. The reverse side was printed in green ink, so Demand Notes were dubbed “greenbacks.” Initially, they were discounted relative to gold, but being fully redeemable in gold, they were soon at par. In December 1861, the government had to suspend redemption, and the Demand Notes declined.

How A Strong Greenback Affects the Economy (AAPL, BMY)

Following the conclusion of the Civil War, the greenback continued to be in circulation and gradually gained wider acceptance as a medium of exchange. However, due to concerns regarding their value, the greenbacks experienced periods of fluctuation in relation to other currencies. This led to the eventual development of the gold standard in the United States, where the value of the dollar was tied to the value of gold. Authorized by Congress as legal tender, they could not be redeemed in gold or coins. Deriving its main support from Western farmers, it favoured the issue of more greenbacks to stimulate prices.

United States Note

Its distinct green color, originating from the ink used in printing, has given rise to its nickname. With a fascinating origin rooted in the American Civil War, the greenback has become a ubiquitous symbol of value and economic power. Its role as a global reserve currency and medium of exchange further solidifies its position among the most influential currencies in the world. The government backed this currency and stated that it could be used to pay back public and private debts. However, despite the government backing, they were not exchangeable for gold or silver. The idea of issuing paper money was opposed by bankers because it would bring the federal government into markets and could potentially translate to its bankruptcy if the war failed to go in its favor.

A few days later, the United States Treasury authorized the issue of $150 million USD worth of paper Legal Tender Notes, which paved the way for modern day currency. Just a few months later, on 29 August 1862, the first modern day currency was produced when the Chief of the Federal Bureau and five clerks printed paper notes in the basement of the United States Treasury Building. The term “greenback” is a slang word for the United States Federal Reserve Note, commonly referred to as the US Dollar (USD). Greenbacks also have a historical connotation, however, referring to the debate over economic policy throughout the Civil War Era. The name comes from the green color of the ink used on Demand Notes, which were issued by the US government from late 1861 to early 1862. Conversely, sales and earnings for numerous US multinationals that sell their products and services globally would be affected by the stronger dollar.

Notes

An appreciating dollar would boost returns from US investments, an attractive proposition for international investors. On the other hand, an appreciating dollar benefits companies that import a great deal of machinery and equipment, like engineering and industrial companies, since these would now cost less in dollar terms. The UBS team said it expects gold to represent a larger share of reserves in the years ahead. But the buck’s worldwide popularity as a currency used to settle international transactions has barely budged in recent years, even if it has dimmed a bit since China joined the World Trade Organization in 2001.

The Confederate Government Also Issued Paper Money

Capturing more than 1 million votes, the independent political party placed 14 members in Congress. The Greenbackers received few votes and lost seats in Congress, in part because the economy had rebounded. The Panic of 1873 and the subsequent depression polarized the nation on the issue of money, with farmers and others demanding the issuance of additional greenbacks or the unlimited coinage of silver. The party’s name referred to the non-gold backed paper money, commonly known as “greenbacks”, that had been issued by the North during the American Civil War and shortly afterward.

By 1867, over $350 million USD worth of greenbacks were making their rounds through the United States. Some confusion ensued as the coin-backed Demand Notes clashed with the new greenbacks on the national market. By printing large amounts of fiat money not backed by gold or silver, the greenbacks significantly increased the money supply. This led to inflation, meaning the greenbacks declined in purchasing power, and prices for consumer goods increased. In conclusion, the greenback, also known as the United States dollar, holds great importance in the world of finance.

There are mechanisms built into the repurchase agreement space to help mitigate this risk. In many cases, if the collateral falls in value, a margin call can take effect to ask the borrower to amend the securities offered. In situations in which it appears likely that the value of the security may rise and the creditor may not sell it back to the borrower, under-collateralization can be utilized to mitigate risk. Despite the similarities to collateralized loans, repos are actual purchases. However, since the buyer only has temporary ownership of the security, these agreements are often treated as loans for tax and accounting purposes.

1. Both the repurchase and reverse repurchase portions of the contract are determined and agreed upon at the outset of the deal.
2. In some cases, the underlying collateral may lose market value during the period of the repo agreement.
3. The FSB believes that there may be a case for welcoming the establishment and wider use of CCPs for inter-dealer repos against safe collateral (i.e. government securities) for financial stability purposes.

However, both transactions can be documented under the same type of agreement, as shown by the European Master Agreement, and they have similar legal foundations. ICMA Education has been setting the standard of training excellence in the capital markets for almost five decades with courses covering everything from market fundamentals to latest developments and more. Of course, short sales may not work out as planned—the stock may go up in price.

Demystifying U.S. Repo and Securities Lending Markets

A repurchase agreement, or repo, is a short-term lending mechanism that involves a bank selling securities, usually government bonds or other debt instruments with steady values, to an investor and then buying them back a short time after at a slightly higher price. Repos essentially function as short-term, collateral-backed, interest-bearing loans, with the buyer playing the role of lender, the seller as the borrower, and the security as the collateral. Nonetheless, in spite of regulatory changes over the last decade, there remain systemic risks to the repo space. The Fed continues to worry about a default by a major repo dealer that might inspire a fire sale among money funds which could then negatively impact the broader market. The future of the repo space may involve continued regulations to limit the actions of these transactors, or it may even eventually involve a shift toward a central clearinghouse system.

On the other hand, there is a risk for the borrower in this transaction as well; if the value of the security rises above the agreed-upon terms, the creditor may not sell the security back. Securities lending provides liquidity to markets, can generate additional interest income for long-term holders of securities, and allows for short-selling. Furthermore, since the crisis, the Treasury has kept funds in the Treasury General Account (TGA) at the Federal Reserve rather than at private banks. As a result, when the Treasury receives payments, such as from corporate taxes, it is draining reserves from the banking system.

Understanding Repurchase Agreements

The repo rate spiked in mid-September 2019, rising to as high as 10 percent intra-day and, even then, financial institutions with excess cash refused to lend. This spike was unusual because the repo rate typically trades in line with the Federal Reserve’s benchmark federal funds rate at which banks lend reserves https://1investing.in/ to each other overnight. The Fed’s target for the fed funds rate at the time was between 2 percent and 2.25 percent; volatility in the repo market pushed the effective federal funds rate above its target range to 2.30 percent. A reverse repurchase agreement (reverse repo) is the mirror of a repo transaction.

This assessment has been central in the work and ultimately policy suggestions and directions the FSB has been providing ever since 2012. These dynamics will be discussed in the following subsets of this chapter and are based on the final FSB policy recommendations as issued in 2013 regarding securities lending and repos. When the government runs a budget deficit, it borrows by issuing Treasury securities. The additional debt leaves primary dealers—Wall securities lending vs repo Street middlemen who buy the securities from the government and sell them to investors—with increasing amounts of collateral to use in the repo market. A repurchase agreement involves the sale of securities to a counterparty subject to an agreement to repurchase the securities at a later date. In the U.S., standard and reverse repurchase agreements are the most commonly used instruments of open market operations for the Federal Reserve.

In the CCP chapter, the suggested standards and evolution are discussed. Holding a lot of reserves won’t push a bank over the threshold that triggers a higher surcharge; lending those reserves for Treasuries in the repo market could. An increase in the systemic score that pushes a bank into the next higher bucket would result in an increase in the capital surcharge of 50 basis points. So banks that are near the top of a bucket may be reluctant to jump into the repo market even when interest rates are attractive. The Fed is considering the creation of a standing repo facility, a permanent offer to lend a certain amount of cash to repo borrowers every day.

The Eurosystem endeavours to offer effective and accessible securities
lending arrangements. Securities purchased under the public sector purchase programme (PSPP) have been made available for securities
lending in a decentralised manner by Eurosystem central banks since 2 April 2015. The authors of the paper do not attempt to size securities lending because no comprehensive regulatory data collection covering this activity is currently available. Instead, market participants and policymakers rely on market surveys and data collections conducted by data vendors.

Repo vs. Reverse Repo: What’s the Difference?

Securities lending is neither tracked by the Securities and Exchange Commission (SEC) nor the Financial Industry Regulatory Authority (FINRA), though both continually warn investors of the risks involved in this market. In April 2017, Morgan Stanley settled a case in which Massachusetts’ top securities regulator accused the bank of encouraging brokers to push SBL in cases where it wasn’t needed, and with that ignoring the risks involved. The seller gets the cash injection it needs, whereas the buyer gets to make money from lending capital. The major difference between a term and an open repo lies in the amount of time between the sale and the repurchase of the securities. Assuming the share price drops to $75, the investor will then purchase 50 shares for $3,750 (50 shares x $75 price) and return them to the securities firm. In this case, the profit on this short-sale transaction is $1,250 ($5,000 – $3,750).

This action infuses the bank with cash and increases its reserves of cash in the short term. The Federal Reserve will later resell the securities back to the banks. Managers of hedge funds and other leveraged accounts, insurance companies, and money market mutual funds are among those active in such transactions. A repurchase agreement (RP) is a short-term loan where both parties agree to the sale and future repurchase of assets within a specified contract period. The seller sells a security with a promise to buy it back at a specific date and at a price that includes an interest payment. Essentially, repos and reverse repos are two sides of the same coin—or rather, transaction—reflecting the role of each party.

Understanding Securities-Based Lending

The TGA has become more volatile since 2015, reflecting a decision by the Treasury to keep only enough cash to cover one week of outflows. The real risk of repo transactions is that the marketplace for them has the reputation of sometimes operating on a fast-and-loose basis without much scrutiny of the financial strength of the counterparties involved, so some default risk is inherent. Just like a repo, SLAB is a fully collateralized transaction that is reversed at a later date. The borrower pays a fee to the lender for the use of the loaned security. It precludes the need to sell securities, thereby avoiding a taxable event for the investor and ensuring the continuation of the investor’s investment strategy.

A dealer sells securities to a counterparty with the agreement that they will buy them back at a higher price on a specific date. In this agreement, the counterparty gets the use of the securities for the term of the transaction and will earn interest stated as the difference between the initial sale price and the buyback price. The interest rate is fixed, and interest will be paid at maturity by the dealer. A term repo is used to invest cash or finance assets when the parties know how long they will need to do so.

Beneficial owners, typically risk-averse investors, drive the securities lending market, while the repo market is driven by market intermediaries, who are leveraged risk-takers. The securities lending market is preferred for borrowing equity, while the repo market is favored for cash borrowing and larger deals. Between 2008 and 2014, the Fed engaged in Quantitative Easing (QE) to stimulate the economy. The Fed created reserves to buy securities, dramatically expanding its balance sheet and the supply of reserves in the banking system. When the Fed started to shrink its balance sheet in 2017, reserves fell faster. Repurchase agreements, or repos, involve the sale of securities with the agreement to buy them back at a specific date, usually for a higher price.

A loan fee, or borrow fee, is charged by a brokerage to a client for borrowing shares, along with any interest due related to the loan. The loan fee and interest are charged pursuant to a Securities Lending Agreement that must be completed before the stock is borrowed by a client. Holders of securities that are loaned receive a rebate from their brokerage. Repurchase agreements are typically short-term transactions, often literally overnight.

Financial Markets Operations Courses

Cash investors are incentivised to use the repo market because of favorable initial margins and haircuts, while cash borrowers prefer it because of easier fixed-term and larger deals. Beneficial owners often choose securities lending due to existing agreements and security vs security options that avoid cash collateral and provide indemnification by agent lenders. Securities lending and repo markets perform similar functions, but legal differences and market characteristics explain their coexistence. One key difference is that securities lending is securities-driven, and initial margin or haircut favors the securities lender, while repo is cash driven and it is the party providing cash that benefits.

In all of these scenarios, the benefit to the securities lender is either to earn a small return on securities currently held in its portfolio or to possibly meet cash-funding needs. Although potentially jumping the gun, I feel that the monitoring models and protocols suggested are like screening the universe in search for intelligent life using human life as we know as the prototype. Logical, but not necessarily successful as the systemic risk transform as activities moving in and out of the paradigm that constitutes the shadow banking sector partly defined by the type and evolution of the regulation imposed on the traditional banking sector. Post-crisis rules require that banks prepare recovery and resolution plans, or living wills, to describe the institutions’ strategy for an orderly resolution if they fail.

For the party selling the security and agreeing to repurchase it in the future, it is a repurchase agreement (RP). For the party buying the security and agreeing to sell in the future, it is a reverse repurchase agreement (RRP). The difference in the repo however is that repos are driven by the need to borrow and lend cash while securities lending and borrowing transactions are driven by the need of a party to borrow and lend securities. Another key difference is that while securities lending uses largely equity securities and cash as collateral, the repo market uses fixed income instruments as collateral. This is done largely because the security being borrowed is normally a fixed income security itself while in securities lending, equity securities are the object being traded.