The New York Fed posted a piece, "Financial Innovation: The Origins of the Tri-Party Repo Market," on its Liberty Street Economics blog. It says, "The conventional wisdom about financial innovation is that it is typically undertaken as a way to increase profits. However, financial innovation can also occur as a response to the need to reduce risk. Tri-party repo is an example of such innovation. While tri-party repo ultimately evolved in ways that created and amplified systemic risk (as we will describe in our next post), its origin was as a solution to inefficiencies and risks associated with the repo settlement arrangements prevailing at the time." In other news, the Wall Street Journal's Vipal Monga wrote in the CFO Journal, "Verizon Taps CP Market in Rare Move for M&A Financing." He writes, "Verizon Communications Inc. is taking a rare step by financing its $4.4 billion acquisition of AOL Inc. by issuing commercial paper. "Most companies have been trying to push out acquisition financing in the [long-term] bond market," said Chris Conetta, head of global commercial paper trading at Barclays PLC. "A lot of that [financing] has bypassed the commercial paper market." Verizon, which had $550 million of commercial paper outstanding at the end of March, has been ramping up issuance in that market in recent months. It only had $19 million outstanding at the end of December. A company spokesman said the company increased issuance "in the context of normal cash movements to fund our operations." Although a company spokesman declined to give rationale for tapping the CP market to finance part the deal (Verizon will also be using cash on hand), it's likely the telecommunications company feels that it can't go to the long-term bond markets for the time being." It continues, "The company has a relatively mediocre commercial paper rating as well, at A2/P2, below the highest AA rating.... Borrowing rates in the commercial paper market are very low, but they have been trending up. Companies rated A2/P2 can expect to pay 0.54% for securities maturing in 90 days, according to the Federal Reserve. That's up from 0.27% a year ago. "Rates are still ridiculously low," said Peter Crane, CEO of money-market fund tracker Crane Data LLC."
