Repo market functioning

April 2017

Report prepared by a Study Group established by the Committee on the Global Financial System. The Group was chaired by Sir Jon Cunliffe, Bank of England.

Repo markets play a key role in facilitating the flow of cash and securities around the financial system. The CGFS Study Group on repo market functioning analysed changes in the availability and cost of repo financing, and how these affect the ability of repo markets to support the financial system, both in normal and stressed conditions. The Group focused on repo transactions backed by government bonds.

Repo markets are in a state of transition and differ across jurisdictions in terms of both their structure and their functioning. Underneath the relative stability in headline measures of activity and pricing, there are signs of banks being less willing to undertake repo market intermediation, compared to the period before the crisis. The volatility in prices and volumes around balance sheet reporting dates can be associated with banks in some jurisdictions contracting their repo exposure in order to "window dress" their regulatory ratios.

The report identifies several drivers behind these changes including exceptionally accommodative monetary policy, which 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, which have made intermediation more costly in terms of regulatory capital. Considered from the narrow perspective of repo markets, the balance between the costs and the benefits of these changes is unclear and differs across jurisdictions. The effect of market adaptations will require more time to mature. Measures that have been adopted by some central banks to reduce the scarcity of certain repo collateral, and others initiated in certain jurisdictions with the objective of facilitating monetary policy, have improved repo market functioning.

JEL classification: E58 , G12 , G24 , G28

Keywords: Repo market liquidity, unconventional monetary policy, regulatory reform, netting