There has been a lot of discussion regarding quarter end repo spikes as dealers reduce their balance sheet. I've been reading it all over Bloomberg and I saw overnight GC as high as 3.6% on my screens. Is this the result of banks pulling funding from repo (i.e. not lending cash and taking in collateral) due to regulation? What's the penalty if they don't reduce balance sheet? Why don't borrowers just lock in a longer term repo rate so they're not exposed to these funding costs?
Lastly, I learned that it also helps that the new Treasury securities (2y, 5y, and 7y) auctioned this past week settles on 4/1. Since this is after quarter-end, it would not be included in the regulatory calculation. In addition, there's no exchange of cash until 4/1 since these issues are purchased on a when-issued basis.