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Central clearing and the pricing of specialness in repo markets

Author

Listed:
  • Metzler, Julian
  • Danisewicz, Piotr
  • Dieler, Tobias
  • Mancini, Loriano
  • Mazzari, Francesco

Abstract

Repo markets clear either bilaterally over the counter (OTC) or through central counterparties (CCPs), which differ in how counterparty risk is priced. In bilateral markets, repo rates reflect borrower-specific risk, while CCP clearing pools counterparties and applies a common pricing rule. We develop a model of security-driven repo in which repo rates are non-linear in borrower risk. As a result, averaging borrower-specific OTC prices yields more negative rates than pricing the pooled borrower in CCP markets. The model predicts that the CCP–OTC specialness gap compresses during periods of counterparty uncertainty and varies with borrower and collateral characteristics. Using transaction-level data from the euro-area interbank repo market around the March 2020 COVID-19 shock, we find evidence consistent with these predictions. Our results show that central clearing dampens specialness in normal times but stabilizes repo pricing during stress. JEL Classification: D47, D82, G14, G15, G21

Suggested Citation

  • Metzler, Julian & Danisewicz, Piotr & Dieler, Tobias & Mancini, Loriano & Mazzari, Francesco, 2026. "Central clearing and the pricing of specialness in repo markets," Working Paper Series 3214, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20263214
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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