Repo collateral reuse and liquidity windfalls

Collateral reuse in repo markets helps entities meet short-term funding needs, maintain market efficiency, and anchor collateral valuations, although it creates risks through interconnectedness. A prominent view in the literature is that securities dealers use their market position to obtain temporary free-cash wedges from differences in collateral requirements when reusing collateral, so-called “liquidity windfalls”. By affecting dealers’ funding structures, such windfalls could influence yield curve determination, leverage, and monetary policy transmission. Yet the evidence has been largely theoretical, with limited empirical work. Using a novel, confidential regulatory dataset on European Securities Financing Transactions, this study helps fill that gap. We find that about 11.6% of European repo transaction volume relies on reused securities, averaging more than 49 billion euros per day. Moreover, contrary to the liquidity windfalls hypothesis, dealers do not seem to systematically obtain extra liquidity through collateral reuse in repos. JEL Classification: G15, G21, G23