The global repo market, a key cog in the financial system’s plumbing, has yet to settle into the post-financial crisis economic and regulatory environment, central bankers have warned.
A report by the Bank of International Settlements’ (BIS) committee on the global financial system today concluded: “We need to keep an eye on this market.”
BIS, the so-called “central bankers’ bank”, said it plans to conduct a follow-up study on the market within the next two years.
Repurchasing agreements form a key market for short-term funding. The trillion-dollar repo market enables large institutions to pawn securities for short-term loans.
“Repo markets play a key role in facilitating the flow of cash and securities around the financial system,” Bank of England deputy governor Sir Jon Cunliffe, who chaired the study group, said.
“These markets are clearly adjusting to new regulatory standards, accommodative monetary policy and to new market adaptations and developments.
“Some jurisdictions have seen a change in repo market intermediation and the way the market provides repo services to end users.
“Given the important economic functions that repo performs we need to monitor closely how this develops.”
The committee’s chair, William Dudley, president of the Federal Reserve Bank of New York, said: “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.”