A report on repo markets functioning has been published by the Committee on the Global Financial System, analysing the changes in the availability and cost of repo financing, which is a key market for short-term funding.
The report looks at how these changes affect the ability of repurchasing agreements to support the financial system. It highlights substantial differences in the way repo markets, which allow borrowers to pawn securities for short-term loans, work across countries.
Repo markets provide a number of key economic functions and have nearly $9 trillion worth of outstanding repo and reverse repo agreements secured with government bonds.
Repo markets 'not settled yet'
The committee's chair, William Dudley, also president of the Federal Reserve Bank of New York, said: “The key takeaway from this work is that repo markets are not settled yet. The effects of unconventional monetary policy and regulatory reforms work in opposite directions in many cases, and they are not the same in all markets. We need to keep an eye on this market because it is critical for the smooth functioning of the system.”
Bank of England deputy governor Sir Jon Cunliffe said: “Repo markets play a key role in facilitating the flow of cash and securities around the financial system. These markets are clearly adjusting to new regulatory standards, accommodative monetary policy and to new market adaptations and developments. Some jurisdictions have seen a change in repo market intermediation and the way the market provides repo services to end users. Given the important economic functions that repo performs we need to monitor closely how this develops.”
Drivers of change
The report identifies several drivers behind the changes, including:
- exceptionally accommodative monetary policy, which has provided ample central bank liquidity to the market and reduced the need for banks to trade reserves through the repo market; and
- changes in regulation that have made intermediation more costly in terms of regulatory capital.
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