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Hedge Funds and Banks help in fueling disruptions

The big hedge funds and banks have helped in the fueling of disruptions in the lending markets overnight some months ago and they continue posing a threat to the finance system as per an analysis.

A cash crunch which took place in the middle of September had led to a rise in repo markets’ rates of very short term where the banks exchange the collateral of high quality and cash as they agree to buy those assets back with the addition of interest. Repo is a thing which is essential for the plumbing of the banks for conducting their operations.

The officials of Federal Reserve have attributed this problem to the corporate tax payment rush and a settlement for a settlement that is unusually large in the auctions of Treasury bonds.

The BIS has however said that while these two factors have helped in the explanation of some of the problems they are going to fall short of a full amount of accounting.

Neither of these factors can completely explain the jump in the repo rates which had been exceptional as per the analysis.

The other factors which had been cited by the institution included the heavy reliance for funding on the top four banks and the role which the hedge funds have been increasingly playing in the demand of the funding and the adjustments which make the market participants follow a period of ample reserves that is extended and has seen over the previous two years.

The officials of the Fed have been puzzled over the unwillingness of the banks to lending to the market when the disruption of September 17 took place.

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