Decomposing Changes in the Functioning of the Sterling Repo Market

26 Pages Posted: 6 May 2019

Date Written: May 3, 2019

Abstract

We identify the degree to which changes in gilt repo market functioning have been driven by changes in the supply of — and the demand for — market intermediation. To do so, we use a structural vector auto regression (SVAR) model with sign and zero restrictions. We find that changes in gilt repo market functioning over the past five years have been driven largely by changes in the supply of repo market intermediation by dealers, rather than by changes in the demand of end-users. Following the introduction of the UK leverage ratio, our model suggests that an increase in demand for repo by end-users results in a larger increase in the cost of repo transactions and a smaller increase in their volume. This effect is stronger in the case of transactions that are not nettable via central counterparties. These findings are consistent with the notion that the leverage ratio may reduce dealers’ ability and/or willingness to act as repo market intermediaries. This may have implications for the resilience of repo markets in future periods of stress.

Keywords: repo market, capital regulation, leverage ratio, non-bank financial institutions

JEL Classification: C58, G10, G12, G18, G23

Suggested Citation

Noss, Joseph and Patel, Rupal, Decomposing Changes in the Functioning of the Sterling Repo Market (May 3, 2019). Bank of England Working Paper No. 797 (2019), Available at SSRN: https://ssrn.com/abstract=3382351 or http://dx.doi.org/10.2139/ssrn.3382351

Joseph Noss

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Rupal Patel (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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