An April 12, 2017 report issued by the Bank for International Settlement’s Committee on the Global Financial System (CGFS) takes stock of the state of repo markets. Drawing on a number of sources, the report surveys the landscape of the repo markets, taking into account the effects of the financial crisis, changes in the regulatory landscape, and the unprecedented period central bank stimulus.
The report is based on evidence on the changes in repo market functioning gathered from a variety of sources, including:
- questionnaires sent to members of the Committee on the Global Financial System,
- surveys of repo market intermediaries and end users,
- discussions with market practitioners,
- a roundtable held with industry representatives,
- publicly available data, and
- data provided by central banks and private sector senior contacts.
Based on their review of the evidence, the CGFS found that repo markets remain in a period of transition and uncertainty. According to William Dudley, President of the Federal Reserve Bank of New York and chair of the CGFS, "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."
The report identifies several factors driving changes in the repo markets, 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.
The CGFS working group also examined, from the narrow perspective of repo markets, the costs and benefits of these developments, the balance of which differs across jurisdictions. However, their review was inconclusive:
“Given the differences in repo markets across jurisdictions and the fact that repo markets are in a state of transition, it is too soon to establish strong links between the different drivers and the observed changes in markets, or to reach clear-cut conclusions on the need for policy measures.”
The repo working group of the CGFS indicated that they would be undertaking a similar study over the next two years in order "to form a clearer view of how repo market functioning has been shaped by, and adapted in response to, the various drivers identified in this report.”
The full text of the April 12, 2017 study is available via http://www.bis.org/publ/cgfs59.pdf