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Trading relationships in secured markets: Evidence from triparty repos

Author

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  • Han, Song
  • Nikolaou, Kleopatra
  • Tase, Manjola

Abstract

The Triparty Repo (TPR) market lies at the heart of the US short-term funding markets. This paper demostrates the existence of strong and stable relationships between investors (Money Market Funds) and dealers in this market, which can significantly affect terms of trade (the probability of a trade and the volume and, to some extent, the price of actual trades). Importantly, such relationships support the funding role of the TPR market, as dealers can rely on such relationships to secure funding in the face of liquidity shocks. We consider two shocks: (i) the Federal Reserve’s Overnight Reverse Repurchase (ON RRP) operations, a negative shock to the supply of funds for dealers; and (ii) Treasury auctions, a positive shock to the demand for funds by dealers. Our results suggest that relationships provide a built-in mechanism in the TPR market to support stability in face of funding shocks.

Suggested Citation

  • Han, Song & Nikolaou, Kleopatra & Tase, Manjola, 2022. "Trading relationships in secured markets: Evidence from triparty repos," Journal of Banking & Finance, Elsevier, vol. 139(C).
    • Handle: RePEc:eee:jbfina:v:139:y:2022:i:c:s0378426622000851
    DOI: 10.1016/j.jbankfin.2022.106486
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    References listed on IDEAS

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    1. Tobias Dieler & Loriano Mancini & Norman Schürhoff, 2021. "(In)efficient repo markets," Swiss Finance Institute Research Paper Series 21-10, Swiss Finance Institute.
    2. Josh Frost & Lorie Logan & Antoine Martin & Patrick E. McCabe & Fabio M. Natalucci & Julie Remache, 2015. "Overnight RRP operations as a monetary policy tool: some design considerations," Staff Reports 712, Federal Reserve Bank of New York.
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    4. Alyssa G Anderson & John Kandrac, 2018. "Monetary Policy Implementation and Financial Vulnerability: Evidence from the Overnight Reverse Repurchase Facility," Review of Financial Studies, Society for Financial Studies, vol. 31(9), pages 3643-3686.
    5. Li, Yi, 2021. "Reciprocal lending relationships in shadow banking," Journal of Financial Economics, Elsevier, vol. 141(2), pages 600-619.
    6. Petersen, Mitchell A & Rajan, Raghuram G, 1994. "The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
    7. Dong Lou & Hongjun Yan & Jinfan Zhang, 2013. "Anticipated and Repeated Shocks in Liquid Markets," The Review of Financial Studies, Society for Financial Studies, vol. 26(8), pages 1891-1912.
    8. Benjamin Munyan, 2015. "Regulatory Arbitrage in the Repo Market," Working Papers 15-22, Office of Financial Research, US Department of the Treasury.
    9. Adam Copeland & Antoine Martin & Michael Walker, 2014. "Repo Runs: Evidence from the Tri-Party Repo Market," Journal of Finance, American Finance Association, vol. 69(6), pages 2343-2380, December.
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    Cited by:

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    2. Huber, Amy Wang, 2023. "Market power in wholesale funding: A structural perspective from the triparty repo market," Journal of Financial Economics, Elsevier, vol. 149(2), pages 235-259.
    3. Hüser, Anne-Caroline & Lepore, Caterina & Veraart, Luitgard A. M., 2024. "How does the repo market behave under stress? Evidence from the COVID-19 crisis," LSE Research Online Documents on Economics 121347, London School of Economics and Political Science, LSE Library.
    4. Pala, Melissa, 2023. "COVID-19 and the Fragmentation of the European Interbank Market," VfS Annual Conference 2023 (Regensburg): Growth and the "sociale Frage" 277572, Verein für Socialpolitik / German Economic Association.

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    More about this item

    Keywords

    Triparty repos; Over-the-counter (OTC) markets; Trade relationships; ON RRP exercise; Treasury auctions; Liquidity shock;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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