Tag: repo market

Collateral re-use: unveiling the risk of delivery failures and higher volatility in the repo market

Miruna-Daniela Ivan

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The widespread practice of financial institution to re-use securities received as collateral plays a key role in the repurchase agreement (repo) market functioning. By increasing the availability of securities which can be used as collateral, collateral re-use lowers funding costs under normal market conditions, allowing collateral to flow to where it is most needed. But this activity may amplify the risk of delivery failures and increase volatility in repo rates during periods of market stress. This article explores the level of collateral re-use in the gilt repo market, applying algorithms from academic literature to the Bank’s Sterling Money Market Data, and provides supporting evidence of collateral re-use procyclicality, and its positive relation to repo rates volatility.

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Repo Market Functioning: The Role of Capital Regulation

Antonis Kotidis and Neeltje van Horen

The leverage ratio requires banks to hold capital in proportion to the overall size of their balance sheet. As opposed to the capital ratio, risk-weights are irrelevant to its calculation. The leverage ratio therefore makes it relatively more costly for banks to engage in low margin activities. One such activity – which is crucial to the transmission of monetary policy and financial stability – is repo.  This column shows that a tightening of the leverage ratio resulting from a change in reporting requirements incentivised UK dealers to reduce their repo activity, especially affecting small banks and non-bank financial institutions. The UK gilt repo market, however, showed resilience with foreign, non-constrained dealers quickly stepping in.

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