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Repo Market Functioning when the Interest Rate Is Low or Negative

Author

Listed:
  • Jean-Sébastien Fontaine
  • James Hately
  • Adrian Walton

Abstract

This paper investigates how a low or negative overnight interest rate might affect the Canadian repo markets. The main conclusion is that the repo market for general collateral will continue to function effectively. However, changes to market conventions—such as the introduction of a charge for settlement fails—or other institutional changes may be required so that the repo market for specific collateral continues to support liquidity on the secondary market for government bonds. The historical experience shows that the special repo market in other jurisdictions can function effectively even if the overnight rate is negative. Closer examination suggests what specific circumstances can lead to persistent settlement fails in the specific collateral repo market. Specifically, the combination of (i) low or negative interest rates, (ii) large aggregate short positions in bonds, and (iii) economic or policy surprises may lead to persistent settlement fails.

Suggested Citation

  • Jean-Sébastien Fontaine & James Hately & Adrian Walton, 2017. "Repo Market Functioning when the Interest Rate Is Low or Negative," Discussion Papers 17-3, Bank of Canada.
    • Handle: RePEc:bca:bocadp:17-3
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    References listed on IDEAS

    as
    1. Michael J. Fleming & Kenneth D. Garbade, 2005. "Explaining settlement fails," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 11(Sep).
    2. Christopher Reid, 2007. "The Canadian Overnight Market: Recent Evolution and Structural Changes," Bank of Canada Review, Bank of Canada, vol. 2007(Spring), pages 15-29.
    3. Jonathan Witmer & Jing Yang, 2016. "Estimating Canada’s Effective Lower Bound," Bank of Canada Review, Bank of Canada, vol. 2016(Spring), pages 3-14.
    4. Kenneth D. Garbade & Frank M. Keane & Lorie Logan & Amanda Stokes & Jennifer Wolgemuth, 2010. "The introduction of the TMPG fails charge for U.S. Treasury securities," Economic Policy Review, Federal Reserve Bank of New York, vol. 16(Oct), pages 45-71.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Narayan Bulusu & Sermin Gungor, 2018. "Government of Canada Securities in the Cash, Repo and Securities Lending Markets," Discussion Papers 18-4, Bank of Canada.
    2. Jean-Sébastien Fontaine & James Pinnington & Adrian Walton, 2017. "What Drives Episodes of Settlement Fails in the Government of Canada Bond Market?," Staff Working Papers 17-54, Bank of Canada.
    3. Léanne Berger-Soucy & Jean-Sébastien Fontaine & Adrian Walton, 2019. "Prix plafonds sur les marchés canadiens des emprunts d’obligations," Staff Analytical Notes 2019-2-fr, Bank of Canada.
    4. Léanne Berger-Soucy & Jean-Sébastien Fontaine & Adrian Walton, 2019. "Price Caps in Canadian Bond Borrowing Markets," Staff Analytical Notes 2019-2, Bank of Canada.
    5. Christopher S. Sutherland, 2017. "What Explains Month-End Funding Pressure in Canada?," Discussion Papers 17-9, Bank of Canada.
    6. Narayan Bulusu & Sermin Gungor, 2021. "The life cycle of trading activity and liquidity of Government of Canada bonds: Evidence from cash, repo and securities lending markets," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(2), pages 557-581, May.
    7. Léanne Berger-Soucy & Jean-Sébastien Fontaine & Adrian Walton, 2019. "Prix plafonds sur les marchés canadiens des emprunts d’obligations," Staff Analytical Notes 2019-2-fr, Bank of Canada.

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    More about this item

    Keywords

    Financial markets; Interest rates; Market structure and pricing;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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