Regulatory Outreach for Student Education

Engaging Students in the Debate Over Financial Services Reform

Today’s debate over regulatory reform is a watershed activity in the careers of financial industry professionals. Years ago, similar debates over mandated pre-funding of pension liabilities (ERISA) and the reunification of investment banking with commercial banking (Glass Steagall's repeal) changed the direction of financial market evolution. Opinions may differ on the merits of those changes, but no one disputes their significance.

Without question, college students and young professionals should be well-versed in the issues involved in today's debate. The Regulatory Outreach for Student Education (ROSE) program is the Center's way to give top students, tomorrow's business and finance leaders, opportunities to experience the financial regulatory process up-close.  The ROSE program is designed to put students in touch with the regulators, policy-makers, and industry leaders who are currently shaping the financial regulatory landscape.  We then challenge them to research and articulate their own positions on the most intriguing and interesting issues.  

ROSE Program Blog

Sunday, April 16, 2017

Basel Report: "Repo Markets are Not Settled Yet"

Global repo markets in transition post-crisis, regulatory changes and central bank stimulus


Author: David Schwartz J.D. CPA

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

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