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iINTERNATIONAL MONETARY FUND

How Does the Repo Market Behave Under Stress? Evidence From the COVID-19 Crisis

WP/21/267

IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

2021

NOV

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© 2021 International Monetary Fund

WP/21/267

IMF Working Paper

Monetary and Capital Markets Department

How Does the Repo Market Behave Under Stress? Evidence From the COVID-19 Crisis

Prepared by Anne-Caroline Hüser, Caterina Lepore and Luitgard Veraart*

Authorized for distribution by Vikram Haksar

November 2021

IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

ABSTRACT: We examine how the repo market operates during liquidity stress by applying network analysis to novel transaction-level data of the over night gilt repo market including the COVID-19 crisis. During this crisis, the repo network becomes more connected, with most institutions relying on existing trade relationships to transact. There are however significant changes in the repo volumes and spreads during the stress relative to normal times. We find a significant increase in volumes traded in the cleared segment of the market. This reflects a preference for dealers and banks to transact in the cleared rather than the bilateral segment. Funding decreases towards non-banks, only increasing for hedge funds. Further, spreads are higher when dealers and banks lend to rather than borrow from non-banks. Our results can inform the policy debate around the behaviour of banks and non-banks in recent liquidity stress and on widening participation in CCPs by non-banks.

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How does the repo market behave under stress? Evidence from the COVID-19 crisis

Anne-Caroline Hüser * Bank of England Caterina Lepore International Monetary Fund

Luitgard Anna Maria Veraart London School of Economics and Political Science

November 2021

Abstract

We examine how the repo market operates during liquidity stress by applying network analysis to novel transaction-level data of the overnight gilt repo market including the COVID-19 crisis. During this crisis, the repo network becomes more connected, with most institutions relying on existing trade relationships to transact. There are however significant changes in the repo volumes and spreads during the stress relative to normal times. We find a significant increase in volumes traded in the cleared segment of the market. This reflects a preference for dealers and banks to transact in the cleared rather than the bilateral segment. Funding decreases towards non-banks, only increasing for hedge funds. Further, spreads are higher when dealers and banks lend to rather than borrow from non-banks. Our results can inform the policy debate around the behaviour of banks and non-banks in recent liquidity stress and on widening participation in CCPs by non-banks.

Key words: Repo market; liquidity risk; financial networks; market microstructure; COVID-19 crisis.

*

The authors would like to thank Nicola Anderson, Paul Bedford, Geoff Coppins, Jon Hall, Vikram Haksar, Analise Mercieca, Jack McKeown, Manfred Kremer, David Murphy, Paul Nahai-Williamson, Daniel Paravisini, Lukasz Rachel, Matt Roberts-Sklar, Rhiannon Sowerbutts, Neeltje Van Horen as well as participants of a Bank of England research seminar and an IMF workshop on “Modelling Systemic Macro-Financial Risks” for helpful comments and suggestions. Disclaimer: This paper should not be reported as representing the views of the Bank of England (BoE). The views expressed are those of the authors and do not necessarily reflect those of the BoE.

*

Bank of England, Threadneedle St, London, EC2R 8AH, UK, Email: Anne-Caroline.Huser@bankofengland.co.uk

International Monetary Fund, 1900 Pennsylvania Ave., N.W. Washington, DC 20431, USA, Email: cle-pore@imf.org.

London School of Economics and Political Science, Houghton Street, London WC2A 2AE, UK, Email: l.veraart@lse.ac.uk.

Acknowledgement: We would like to thank Nicola Anderson, Paul Bedford, Geoff Coppins, Jon Hall, Vikram Haksar, Analise Mercieca, Jack McKeown, Manfred Kremer, David Murphy, Paul Nahai-Williamson, Daniel Paravisini, Lukasz Rachel, Matt Roberts-Sklar, Rhiannon Sowerbutts, Neeltje Van Horen as well as participants of a Bank of England research seminar and an IMF workshop on “Modelling Systemic Macro-Financial Risks” for helpful comments and suggestions.

Disclaimer: This paper should not be reported as representing the views of the Bank of England (BoE). The views expressed are those of the authors and do not necessarily reflect those of the BoE. The views expressed herein are those of the author and should not be attributed to the IMF, its executive Board, or its management.

How Does the Repo Market Behave Under Stress? Evidence From the COVID-19 Crisis
Author: Anne-Caroline Hüser, Caterina Lepore, and Luitgard Veraart