IDEAS home Printed from https://ideas.repec.org/p/bdi/wpmisp/mip_048_24.html
   My bibliography  Save this paper

The fundamental role of the repo market and central clearing

Author

Listed:
  • Cristina Di Luigi

    (Bank of Italy)

  • Antonio Perrella

    (Bank of Italy)

  • Alessio Ruggieri

    (Bank of Italy)

Abstract

The repo market plays a crucial role in terms of central bank policies and of the funding of the banking system. In this paper, after reviewing the different economic functions of repo contracts, we provide an overview of the structure of government bond repo markets in core advanced economies. We then analyse the main drivers of euro-area repo market dynamics in the last decade: collateral quality, excess liquidity and collateral scarcity, as well as regulatory reforms. Finally, we explore the role of central clearing services – whose extensive use can help increase the stability and efficiency of the repo market – and the impact of the development of new client clearing models in the repo market, arguing that greater use of these models may lead to greater market efficiency and resilience.

Suggested Citation

  • Cristina Di Luigi & Antonio Perrella & Alessio Ruggieri, 2024. "The fundamental role of the repo market and central clearing," Mercati, infrastrutture, sistemi di pagamento (Markets, Infrastructures, Payment Systems) 48, Bank of Italy, Directorate General for Markets and Payment System.
    • Handle: RePEc:bdi:wpmisp:mip_048_24
    as

    Download full text from publisher

    File URL: https://www.bancaditalia.it/pubblicazioni/mercati-infrastrutture-e-sistemi-di-pagamento/approfondimenti/2024-048/N.48-MISP.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Andreas Schrimpf & Hyun Song Shin & Vladyslav Sushko, 2020. "Leverage and margin spirals in fixed income markets during the Covid-19 crisis," BIS Bulletins 2, Bank for International Settlements.
    2. Ranaldo, Angelo & Schaffner, Patrick & Vasios, Michalis, 2021. "Regulatory effects on short-term interest rates," Journal of Financial Economics, Elsevier, vol. 141(2), pages 750-770.
    3. Corradin, Stefano & Maddaloni, Angela, 2020. "The importance of being special: Repo markets during the crisis," Journal of Financial Economics, Elsevier, vol. 137(2), pages 392-429.
    4. Stacey Anderson & Jean-Philippe Dion & Héctor Pérez Saiz, 2013. "To Link or Not To Link? Netting and Exposures Between Central Counterparties," Staff Working Papers 13-6, Bank of Canada.
    5. van Horen, Neeltje & Kotidis, Antonios, 2018. "Repo market functioning: The role of capital regulation," CEPR Discussion Papers 13090, C.E.P.R. Discussion Papers.
    6. Luca Baldo & Filippo Pasqualone & Antonio Scalia, 2020. "Repo market and leverage ratio in the euro area," Questioni di Economia e Finanza (Occasional Papers) 551, Bank of Italy, Economic Research and International Relations Area.
    7. Miglietta, Arianna & Picillo, Cristina & Pietrunti, Mario, 2019. "The impact of margin policies on the Italian repo market," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    8. Albert J. Menkveld & Guillaume Vuillemey, 2021. "The Economics of Central Clearing," Annual Review of Financial Economics, Annual Reviews, vol. 13(1), pages 153-178, November.
    9. Arrata, William & Nguyen, Benoît & Rahmouni-Rousseau, Imène & Vari, Miklos, 2020. "The scarcity effect of QE on repo rates: Evidence from the euro area," Journal of Financial Economics, Elsevier, vol. 137(3), pages 837-856.
    10. Patrick Schaffner & Angelo Ranaldo & Kostas Tsatsaronis, 2019. "Euro repo market functioning: collateral is king," BIS Quarterly Review, Bank for International Settlements, December.
    11. Mark Paddrik & Carlos Ramirez & Matthew McCormick, 2021. "The Dynamics of the U.S. Overnight Triparty Repo Market," Briefs 21-02, Office of Financial Research, US Department of the Treasury.
    12. Sriya Anbil & Zeynep Senyuz, 2018. "The Regulatory and Monetary Policy Nexus in the Repo Market," Finance and Economics Discussion Series 2018-027, Board of Governors of the Federal Reserve System (U.S.).
    13. Duffie, Darrell & Scheicher, Martin & Vuillemey, Guillaume, 2015. "Central clearing and collateral demand," Journal of Financial Economics, Elsevier, vol. 116(2), pages 237-256.
    14. Brand, Claus & Ferrante, Lorenzo & Hubert, Antoine, 2019. "From cash- to securities-driven euro area repo markets: the role of financial stress and safe asset scarcity," Working Paper Series 2232, European Central Bank.
    15. Benjamin Munyan, 2015. "Regulatory Arbitrage in the Repo Market," Working Papers 15-22, Office of Financial Research, US Department of the Treasury.
    16. Viktoria Baklanova & Ocean Dalton & Stathis Tompaidis, 2017. "Benefits and Risks of Central Clearing in the Repo Market," Briefs 17-04, Office of Financial Research, US Department of the Treasury.
    17. Loriano Mancini & Angelo Ranaldo & Jan Wrampelmeyer, 2016. "The Euro Interbank Repo Market," The Review of Financial Studies, Society for Financial Studies, vol. 29(7), pages 1747-1779.
    18. Allahrakha, Meraj & Cetina, Jill & Munyan, Benjamin, 2018. "Do higher capital standards always reduce bank risk? The impact of the Basel leverage ratio on the U.S. triparty repo market," Journal of Financial Intermediation, Elsevier, vol. 34(C), pages 3-16.
    19. Bassi, Claudio & Behn, Markus & Grill, Michael & Waibel, Martin, 2023. "Window dressing of regulatory metrics: evidence from repo markets," Working Paper Series 2771, European Central Bank.
    20. Annalisa Bucalossi & Antonio Scalia, 2016. "Leverage ratio, central bank operations and repo market," Questioni di Economia e Finanza (Occasional Papers) 347, Bank of Italy, Economic Research and International Relations Area.
    21. Tobias Adrian & John Kiff & Hyun Song Shin, 2018. "Liquidity, Leverage, and Regulation 10 Years After the Global Financial Crisis," Annual Review of Financial Economics, Annual Reviews, vol. 10(1), pages 1-24, November.
    22. Bicu-Lieb, Andreea & Chen, Louisa & Elliott, David, 2020. "The leverage ratio and liquidity in the gilt and gilt repo markets," Journal of Financial Markets, Elsevier, vol. 48(C).
    23. Corradin, Stefano & Eisenschmidt, Jens & Hoerova, Marie & Linzert, Tobias & Schepens, Glenn & Sigaux, Jean-David, 2020. "Money markets, central bank balance sheet and regulation," Working Paper Series 2483, European Central Bank.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ranaldo, Angelo & Schaffner, Patrick & Vasios, Michalis, 2021. "Regulatory effects on short-term interest rates," Journal of Financial Economics, Elsevier, vol. 141(2), pages 750-770.
    2. Hüser, Anne-Caroline & Lepore, Caterina & Veraart, Luitgard Anna Maria, 2024. "How does the repo market behave under stress? Evidence from the COVID-19 crisis," Journal of Financial Stability, Elsevier, vol. 70(C).
    3. Bassi, Claudio & Behn, Markus & Grill, Michael & Waibel, Martin, 2024. "Window dressing of regulatory metrics: Evidence from repo markets," Journal of Financial Intermediation, Elsevier, vol. 58(C).
    4. Eisenschmidt, Jens & Ma, Yiming & Zhang, Anthony Lee, 2024. "Monetary policy transmission in segmented markets," Journal of Financial Economics, Elsevier, vol. 151(C).
    5. Hüser, Anne-Caroline & Lepore, Caterina & Veraart, Luitgard, 2021. "How does the repo market behave under stress? Evidence from the Covid-19 crisis," Bank of England working papers 910, Bank of England, revised 18 Jun 2021.
    6. Gerba, Eddie & Katsoulis, Petros, 2021. "The repo market under Basel III," Bank of England working papers 954, Bank of England.
    7. Angelo Ranaldo & Benedikt Ballensiefen & Hannah Winterberg, 2020. "Monetary policy disconnect," Working Papers on Finance 2003, University of St. Gallen, School of Finance.
    8. Massimiliano Affinito & Matteo Piazza, 2021. "Always Look on the Bright Side? Central Counterparties and Interbank Markets during the Financial Crisis," International Journal of Central Banking, International Journal of Central Banking, vol. 17(1), pages 231-283, March.
    9. van Horen, Neeltje & Kotidis, Antonios, 2018. "Repo market functioning: The role of capital regulation," CEPR Discussion Papers 13090, C.E.P.R. Discussion Papers.
    10. Bassi, Claudio & Behn, Markus & Grill, Michael & Waibel, Martin, 2023. "Window dressing of regulatory metrics: evidence from repo markets," Working Paper Series 2771, European Central Bank.
    11. Baltzer, Markus & Schlepper, Kathi & Speck, Christian, 2022. "The Eurosystem's asset purchase programmes, securities lending and Bund specialness," Discussion Papers 39/2022, Deutsche Bundesbank.
    12. Tobe, Reiko & Uno, Jun, 2024. "Central bank asset purchases and lending: Impact on search frictions," Journal of Financial Intermediation, Elsevier, vol. 58(C).
    13. Tomás Carrera de Souza & Tom Hudepohl, 2022. "The Eurosystem’s bond market share at an all-time high: what does it mean for repo markets?," Working Papers 745, DNB.
    14. Hüser, Anne-Caroline & Lepore, Caterina & Veraart, Luitgard A. M., 2024. "How does the repo market behave under stress? Evidence from the COVID-19 crisis," LSE Research Online Documents on Economics 121347, London School of Economics and Political Science, LSE Library.
    15. Carrera de Souza, Tomás & Hudepohl, Tom, 2024. "Frictions in scaling up central bank balance sheet policies: How Eurosystem asset purchases impact the repo market," Journal of Banking & Finance, Elsevier, vol. 158(C).
    16. Corradin, Stefano & Eisenschmidt, Jens & Hoerova, Marie & Linzert, Tobias & Schepens, Glenn & Sigaux, Jean-David, 2020. "Money markets, central bank balance sheet and regulation," Working Paper Series 2483, European Central Bank.
    17. William Arrata & Benoit Nguyen & Imene Rahmouni-Rousseau & Miklos Vari, 2018. "The Scarcity Effect of Quantitative Easing on Repo Rates: Evidence from the Euro Area," IMF Working Papers 2018/258, International Monetary Fund.
    18. Coen, Jamie & Coen, Patrick & Hüser, Anne-Caroline, 2024. "Collateral demand in wholesale funding markets," Bank of England working papers 1082, Bank of England.

    More about this item

    Keywords

    repurchase agreements; leverage ratio; window dressing; central counterparties; client clearing; money market structure.;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bdi:wpmisp:mip_048_24. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/bdigvit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.