The Repurchase Agreement (Repo) Market

Abstract

Much of this securitized debt is in the form of what are called repurchase agreements. A repurchase agreement (also known as a sale and repurchase agreement, or more popularly as a repo) is a short-term transaction between two parties in which one party borrows cash from the other by pledging a financial security as collateral. A series of regulatory changes in the 1980s made the repo market an attractive source of shortterm-typically overnight-financing for primary dealers to finance their positions in the debt of the U.S. government, federal agencies, corporations, and federal agency mortgage-backed securities. Later, it also became a funding source for others to lend and invest in relatively illiquid mortgage-backed securities.The lack of official statistics precludes an accurate estimation of the size of the repo market. However, Gorton and Metrick (2009a) and also Gorton (2009) estimate that the repo market totaled about $12 trillion as of 2009 (although this estimate likely includes some double counting). Based on the average daily amount outstanding, the Federal Reserve Bank of New York put the primary dealer repo financing of U.S. government, federal agency, corporate, and federal agency mortgage-backed securities at $6.5 trillion in 2008. This amount fell to $4.4 trillion in 2009. This substantial collapse has rendered the shadow banking system of the United States crippled. And notably, the collapse was also central to the financial crisis of 2007 to 2009, featuring, among others, a significant repo run on Bear Stearns in the first two weeks of March 2008. In the repo run on Bear Stearns, the money market funds that financed Bear Stearns's holdings of AAA-rated mortgage-backed securities in the overnight repo market refused to roll over the financing, forcing Bear Stearns to draw down on its liquidity pool, and ultimately ending in its Federal Reserve-assisted sale to JPMorgan Chase.Despite its central role in the shadow banking system-and in the recent financial crisis-there was almost no mention of the repo market in the recently passed U.S. House of Representatives bill (HR 4173). Neither does there appear to be any significant mention of this market in the Senate bill or the final Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. In this chapter, we explain why the silence about dealing with the possibility of future runs in the repo market is a significant mistake. In particular, we explain that, unlike the liquidity risk that unsecured financing may become unavailable to a firm, the liquidity risk that secured repo financing may become unavailable to a firm is inherently a systemic risk: The repo markets are likely to become illiquid precisely when a large part of the financial sector is experiencing stress. Unless this systemic liquidity risk of the repo market is resolved, the risk of a run on the repo market will remain.

ABSNFT: Securitization and Repurchase Scheme for Non-Fungible Tokens Based on Game Theoretical Analysis

“…This makes our mechanism easy to implement. Our mechanism also works well if the threshold is larger than 1 2 . Let v i be N i 's value estimate for one unit of SN F T (id) and p i be the bid provided by…”

“…Repurchase agreement is a short-term transaction between two parties in which one party borrows cash from the other by pledging a financial security as collateral [1]. The former party is called the security issuer, and the latter party is called the investors.…”

“…Majority is a natural requirement for a participant to trigger a repurchase mechanism, and thus our repurchase mechanism sets the threshold as 1 2 . In addition, if the trigger condition is satisfied (i.e., someone holds more than half of shares), then there must be exactly one participant who can trigger the repurchase mechanism.…”

The intertwined relationship of shadow banking and commercial banks’ deposit growth: evidence from India

“…The shadow banking system generally includes unregistered economic activities such as maturity credit and liquidity transformation by the financial intermediaries without access to credit guarantees from the public sector and central bank liquidity (Pozsar et al , 2010). The shadow banking structure, in comparison to the traditional banking system, remains least regulated, or the regulatory framework is absent for the shadow banking system (Acharya and Oncu, 2010). In a similar direction, Schwartz and Carr (2013) have compared China’s regulatory framework to other countries.…”

Shadow banking and financial intermediation

“…High levels of economic activities increase asset prices and liquidity of various types of collaterals (Wilmot et al, 2012); and these, in turn, make more repo funding available for purchasing new securities, contributing to further increases in asset prices. As the liquidity increase during asset price booms, repo markets function smoothly, repos can easily roll over, and investors can finance even risky assets (Acharya & Öncü, 2010). However, these market forces can create a negative feedback mechanism in which a decline in asset prices can result in margin calls, sales of collateral, and a negative feedback loop in repo markets (Gabor, 2016; Pozsar, 2014; Sissoko, 2019).…”