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A Note on Central Counterparties in Repo Markets

Author

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  • Hajime Tomura

Abstract

The author introduces a central counterparty (CCP) into a model of a repo market. Without the CCP, there exist multiple equilibria in the model. In one of the equilibria, a repo market emerges as bond dealers and cash investors choose to arrange repos in an over-the-counter bond market. In another equilibrium, the repo market collapses due to aggregate cash shortage for dealers. Introducing a CCP into the repo market blocks the latter equilibrium. This stabilizing effect of a CCP is robust to idiosyncratic default risk of dealers and asymmetric information about the risk.

Suggested Citation

  • Hajime Tomura, 2012. "A Note on Central Counterparties in Repo Markets," Discussion Papers 12-4, Bank of Canada.
    • Handle: RePEc:bca:bocadp:12-4
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    References listed on IDEAS

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    1. Tobias Adrian & Christopher R. Burke & James J. McAndrews, 2009. "The Federal Reserve's Primary Dealer Credit Facility," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 15(Aug).
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    More about this item

    Keywords

    Payment clearing and settlement systems; Financial markets; Financial stability;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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