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

IMF Working Papers, November 5, 2021

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Research applies network analysis to novel transaction-level data of the overnight gilt repo market including the COVID-19 crisis.
During the COVID-19 crisis, the repo network becomes more connected, with most institutions relying on existing trade relationships to transact.
Significant changes occur in repo volumes and spreads during the stress period relative to normal times.
There is a significant increase in volumes traded in the "cleared" segment of the market, reflecting a preference for dealers and banks to transact in the cleared rather than the bilateral segment.
Funding decreases towards non-banks, with the exception that funding increases for hedge funds.
Spreads are higher when dealers and banks lend to rather than borrow from non-banks.
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 nonbanks.

The repo network becomes more connected during the COVID-19 crisis.
Most institutions rely on existing trade relationships to transact under stress.
Volumes:
- Significant increase in volumes traded in the cleared segment during the crisis.
- Preference emerges for dealers and banks to transact in the cleared segment rather than the bilateral segment.
Funding flows:
- Funding decreases towards non-banks overall.
- Funding increases for hedge funds.
Spreads:
- Spreads are higher when dealers and banks lend to non-banks than when they borrow from non-banks.

Insights inform the policy debate on:
- Behavioural differences between banks and non-banks in episodes of liquidity stress.
- The potential effects and considerations of widening participation in central counterparties (CCPs) by nonbanks.
Findings on increased use of the cleared segment and changes in funding and spreads are relevant for discussions of market structure resilience and central clearing policy.