The Repo Market
The Repo Market
Background
The repo market – from “sale and repurchase” agreement – was introduced by the US Federal Reserve in 1918 as the main tool of the Federal Reserve’s Money Market Operations. Repos were used to drain liquidity from the US banking system and to add liquidity as required.
The size of the Repo Market: Gross amounts outstanding at year end 2007 of roughly $10 trillion (double counting of repos and reverse repos) in the US (70% of US GDP) and €6 trillion in the Euro Repo Markets (65% of Euro-area GDP) and another $1 trillion in the UK Repo Market (Hordal and King, 2008).
The Euro Repo market has grown in size to reach €6 trillion Euros. Two thirds of the collateral is Central Government bonds from Euro area countries. In terms of country of issuance, Germany makes up ¼ of the market followed by Italy at 13%, France at 11% and other Euro area at 15%. Two thirds of repos have a maturity of one month or shorter with the rest up to one year (ECB, 2010).
US Primary Dealers are the most active participants in the US market and have used repos to finance most of the growth of their balance sheets, creating pro-cyclical leverage and an exposure to refinancing risk. In particular the top US Investment banks funded roughly half of their assets using repo markets. While the US repo market is dominated by trading in US Treasuries, there are also active markets in bonds issued by US government sponsored agencies (agencies), agency mortgage backed securities and corporate bonds (Please note that the argument by Gorton 2009, of declining haircuts on Repo transactions related only to structured products). Prior to the crisis, non-governmental collateral contributed significantly to the growth of the market.
Primary dealers are the primary suppliers of collateral in the Repo market. Other suppliers include hedge funds and institutional investors with long investment horizons e.g. pension funds etc.. e.g. in the tri-party repo market in the US
Background
The repo market – from “sale and repurchase” agreement – was introduced by the US Federal Reserve in 1918 as the main tool of the Federal Reserve’s Money Market Operations. Repos were used to drain liquidity from the US banking system and to add liquidity as required.
The size of the Repo Market: Gross amounts outstanding at year end 2007 of roughly $10 trillion (double counting of repos and reverse repos) in the US (70% of US GDP) and €6 trillion in the Euro Repo Markets (65% of Euro-area GDP) and another $1 trillion in the UK Repo Market (Hordal and King, 2008).
The Euro Repo market has grown in size to reach €6 trillion Euros. Two thirds of the collateral is Central Government bonds from Euro area countries. In terms of country of issuance, Germany makes up ¼ of the market followed by Italy at 13%, France at 11% and other Euro area at 15%. Two thirds of repos have a maturity of one month or shorter with the rest up to one year (ECB, 2010).
US Primary Dealers are the most active participants in the US market and have used repos to finance most of the growth of their balance sheets, creating pro-cyclical leverage and an exposure to refinancing risk. In particular the top US Investment banks funded roughly half of their assets using repo markets. While the US repo market is dominated by trading in US Treasuries, there are also active markets in bonds issued by US government sponsored agencies (agencies), agency mortgage backed securities and corporate bonds (Please note that the argument by Gorton 2009, of declining haircuts on Repo transactions related only to structured products). Prior to the crisis, non-governmental collateral contributed significantly to the growth of the market.
Primary dealers are the primary suppliers of collateral in the Repo market. Other suppliers include hedge funds and institutional investors with long investment horizons e.g. pension funds etc.. e.g. in the tri-party repo market in the US
References: ECB (2010), “Euro Repo Markets and the Financial Markets Turmoil”, ECB Monthly Bulletin, February Fabozzi F., S. Mann and M. Choudhry (2002), “Global Money Markets”, Wiley Finance, Chapter 8. Hordal P. and M. King (2008), “Developments in the Repo Markets During the Financial Turmoil”, BIS Quarterly Review, December Copeland A., A. Martin and M. Walker (2010), “The Tri-Party Market before the 2010 Reforms”, Federal Reserve Bank of New York, Staff Reports No. 477.