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Decomposing changes in the functioning of the sterling repo market

Author

Listed:
  • Joseph Noss

    (Financial Stability Board)

  • Rupal Patel

    (Bank of England)

Abstract

We identify the degree to which changes in gilt repo market functioning have been driven by changes in the supply of — and the demand for — market intermediation. To do so, we use a structural vector auto regression (SVAR) model with sign and zero restrictions. We find that changes in gilt repo market functioning over the past five years have been driven largely by changes in the supply of repo market intermediation by dealers, rather than by changes in the demand of end-users. Following the introduction of the UK leverage ratio, our model suggests that an increase in demand for repo by end-users results in a larger increase in the cost of repo transactions and a smaller increase in their volume. This effect is stronger in the case of transactions that are not nettable via central counterparties. These findings are consistent with the notion that the leverage ratio may reduce dealers’ ability and/or willingness to act as repo market intermediaries. This may have implications for the resilience of repo markets in future periods of stress.

Suggested Citation

  • Joseph Noss & Rupal Patel, 2019. "Decomposing changes in the functioning of the sterling repo market," Bank of England Staff Working Paper series 797, Bank of England.
    • Handle: RePEc:boe:boeewp:0797
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    References listed on IDEAS

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    Cited by:

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    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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