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The evolution of repo contracting conventions in the 1980s

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  • Kenneth D. Garbade

Abstract

Contracting 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.

Suggested Citation

  • Kenneth D. Garbade, 2006. "The evolution of repo contracting conventions in the 1980s," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 27-42.
  • Handle: RePEc:fip:fednep:y:2006:i:may:p:27-42:n:v.12no.1
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    References listed on IDEAS

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    1. Norman N. Bowsher, 1979. "Repurchase agreements," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 17-22.
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    Cited by:

    1. Garbade, Kenneth D. & Keane, Frank M., 2017. "The Treasury Market Practices Group: creation and early initiatives," Staff Reports 822, Federal Reserve Bank of New York.
    2. Ewerhart, Christian & Tapking, Jens, 2008. "Repo markets, counterparty risk and the 2007/2008 liquidity crisis," Working Paper Series 909, European Central Bank.
    3. 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.
    4. 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.
    5. Shengxing Zhang, 2014. "Collateral Risk, Repo Rollover and Shadow Banking," 2014 Meeting Papers 562, Society for Economic Dynamics.
    6. Arvind Krishnamurthy & Stefan Nagel & Dmitry Orlov, 2014. "Sizing Up Repo," Journal of Finance, American Finance Association, vol. 69(6), pages 2381-2417, December.
    7. Bank for International Settlements, 2015. "Central bank operating frameworks and collateral markets," CGFS Papers, Bank for International Settlements, number 53.

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    Keywords

    Repurchase agreements ; Contracts;

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