Repo markets play an important role in facilitating the flow of cash and securities throughout the financial system. They allow some market participants to source required short-term funding or collateral and others to undertake short-term, low-risk investment of cash. At the same time, the structure and use of repo markets give rise to vulnerabilities. Borrowing through repo markets enables leverage, can lead to over reliance on short-term funding, and facilitates greater liquidity and maturity transformation. Additionally, repo markets serve as a key channel through which the financial system is interconnected. Recent stress events have highlighted how these vulnerabilities could amplify shocks quickly across the financial system.
This report assesses vulnerabilities in government bond-backed repo markets and possible contagion channels to the broader financial system
The report explains how repo markets function, outlines key features of repo markets around the world, assesses ways to monitor vulnerabilities and associated data gaps, and concludes with relevant policy implications.
