The evolution of repo contracting conventions in the 1980s
AbstractContracting conventions for repurchase agreements, or repos, changed significantly in the 1980s. The growth of the repo market, new uses for repos, and the emergence of new and previously unappreciated risks prompted market participants to revise their contracting conventions. This article describes the evolution of the conventions during that period, focusing on three key developments: the recognition of accrued interest on repo securities, a change in the application of federal bankruptcy law to repos, and the accelerated growth of a new form of repo-tri-party repo. The author argues that the emergence of tri-party repo owed to the efforts of individual market participants acting in their own economic self-interest. By comparison, recognition of accrued interest and the change in bankruptcy law were effected, respectively, by participants taking collective action and seeking legislative relief because uncoordinated, individual solutions would have been more costly. These developments offer important insights into how markets operate: contracting conventions that are efficient in one market environment may have to be revised when the environment changes, and institutional arrangements can change in any number of ways.
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Bibliographic InfoArticle provided by Federal Reserve Bank of New York in its journal Economic Policy Review.
Volume (Year): (2006)
Issue (Month): May ()
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- Norman N. Bowsher, 1979. "Repurchase agreements," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 17-22.
- Gary Gorton & Andrew Metrick, 2010. "Regulating the Shadow Banking System," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 41(2 (Fall)), pages 261-312.
- Arvind Krishnamurthy & Stefan Nagel & Dmitry Orlov, 2012.
"Sizing Up Repo,"
NBER Working Papers
17768, National Bureau of Economic Research, Inc.
- Adam Copeland & Antoine Martin & Michael Walker, 2011. "Repo runs: evidence from the tri-party repo market," Staff Reports 506, Federal Reserve Bank of New York.
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