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A Note on Central Counterparties in Repo Markets

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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.

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File URL: http://www.bankofcanada.ca/wp-content/uploads/2012/03/dp2012-04.pdf
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Bibliographic Info

Paper provided by Bank of Canada in its series Discussion Papers with number 12-4.

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Length: 23 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:bca:bocadp:12-4

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Keywords: Payment; clearing; and settlement systems; Financial markets; Financial stability;

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