Today, the Committee on Payment and Settlement Systems (CPSS) of the Bank for International Settlements (BIS) published a report highlighting issues related to the clearing and settlement infrastructure for repurchase agreements, or repos. The report was written by a working group that forms part of the Financial Stability Board’s (FSB) broader work stream, “Strengthening the core financial infrastructures and markets,” which considers improvements to market infrastructures and measures to reduce the risk of contagion. Generally, repo markets are seen by market participants as a safer and more reliable source of funding than uncollateralized money markets. However, during the recent financial crises, repo markets proved to be a less reliable source of funding liquidity than generally assumed.
Based on a survey of the experience of selected CPSS countries during the recent financial crises with respect to clearing and settlement arrangements for repos, the working group identified the following seven issues related to the repo market infrastructure that have the potential to affect the resilience of repo markets:
- risks related to the extension of significant amounts of intraday credits within some repo settlement arrangements;
- lack of transparency of some repo infrastructure roles, responsibilities, practices and procedures;
- concerns regarding protection against counterparty credit risk in repo transactions;
- inadequate capabilities for liquidating repo collateral in the event of a cash borrower’s default;
- inefficient use of (high-quality) collateral due to constraints within repo clearing and settlement arrangements;
- procyclical effects of certain risk management practices; and
- lack of transparency in the repo market.
However, due to the substantial variety of repo clearing and settlement arrangements, these issues are not relevant to the same extent in each market. The report outlines options and measures through which these issues can be addressed, but concludes that it is worthwhile for the stakeholders in each market to review how the clearing and settlement arrangements for repos in their respective markets could be further strengthened.