The repo market, which is a key component of global financial markets, remains in flux amid both unprecedented monetary policy and major regulatory reform in the wake of the financial crisis, according to a new report from the Committee on the Global Financial System (CGFS).
The CGFS report finds that this key market for short-term funding is still adjusting to the environment of both ultra-low interest rates and post-global financial crisis regulatory reforms — forces that are having disparate impacts on the market.
“The key takeaway from this work is that repo markets are not settled yet,” says William Dudley, president of the Federal Reserve Bank of New York and CGFS chairman, in a statement. “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, which draws on a survey of repo market participants and feedback from the industry, says that monetary policy is reducing the need for banks to trade reserves through the repo market; at the same time, regulatory changes have made intermediation more costly in terms of capital requirements.
“Repo markets play a key role in facilitating the flow of cash and securities around the financial system,” says Sir Jon Cunliffe, deputy governor at the Bank of England and chairman of the study group, in a statement. “Given the important economic functions that repo performs we need to monitor closely how this develops.”
The CGFS is planning to conduct a follow-up study within two years.