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This paper studies the impact of funding market frictions on bond prices and market-wide liquidity. Using proprietary transaction-level data on all gilt-backed repo and reverse-repo trades, we demonstrate how the market power of individual dealers and their linkages generate frictions. Specifically, we show that frictions related to market power account for between 0.5 and 1.3 percentage points of bond yield deviatio…
A repurchase agreement lets investors borrow cash to buy securities. Financier only lends to securities' market value after a haircut and charges interest. Repo pricing is characterized with its puzzling dual pricing measures: repo haircut and repo spread. This article develops a repo haircut model by designing haircuts to achieve high credit criteria, and identifies economic capital for repo's default risk as the ma…
There is an observed basis between repo discounting, implied from market repo rates, and bond discounting, stripped from the market prices of the underlying bonds. Here, this basis is explained as a convexity effect arising from the decorrelation between the discount rates for derivatives and bonds. Using a Hull-White model for the discount basis, expressions are derived that can be used to interpolate the repo rates…
Although not a formal pricing consideration, gap risk or hedging errors are the norm of derivatives businesses. Starting with the gap risk during a margin period of risk of a repurchase agreement (repo), this article extends the Black-Scholes-Merton option pricing framework by introducing a reserve capital approach to the hedging error's irreducible variability. An extended partial differential equation is derived wi…
The general and special repo rates are related with the prices of the European call- and American put-options. The evaluation takes into account specific business models of the parties in the repo agreement and the law restrictions. Using the repo-option relation, an alternative to the Black-Scholes method of option pricing is presented. The empirical data on the general and special repo rates are explained.
ABSTRACT The repo market has been viewed as a potential source of financial instability since the 2007 to 2009 financial crisis, based in part on findings that margins increased sharply in a segment of this market. This paper provides evidence suggesting that there was no system‐wide run on repo. Using confidential data on tri‐party repo, a major segment of this market, we show that, the level of margins and the amou…
In its capacity as debt issuer, the state has played a growing role in financial life over the last 30 years. To examine this role and connect it to shadow banking, the paper develops the concept of the ‘repo trinity’, which captures a set of policy objectives that central banks outlined after the 1998 Russian crisis, the first systemic crisis of collateral-based finance. The repo trinity connected financial stabilit…
The search for a market design that ensures stable bank funding is at the top of regulators' policy agenda. This paper empirically shows that the central counterparty (CCP)-based euro interbank repo market features this stability. Using a unique and comprehensive data set, we show that the market is resilient during crisis episodes and may even act as a shock absorber, in the sense that repo lending increases with ri…
As the financial crisis deepened and unsecured interbank markets effectively shut down, repo market activity became increasingly concentrated in the very shortest maturities and against the highest-quality collateral. Repo rates for US Treasury collateral fell relative to overnight index swap rates, while comparable sovereign repo rates in the euro area and the United Kingdom rose. The different dynamics across marke…
1. INTRODUCTION During the financial crisis of 2007-09, particularly around the time of the Bear Stearns and Lehman Brothers failures, it became apparent that weaknesses existed in the design of the U.S. tri-party repo market, used by major broker-dealers to finance their inventories of securities. These design weaknesses had the potential to rapidly elevate and propagate systemic risk. Following the crisis, an indus…
We take the holistic approach of computing an OTC claim value that incorporates credit and funding liquidity risks and their interplays, instead of forcing individual price adjustments: CVA, DVA, FVA, KVA. The resulting nonlinear mathematical problem features semilinear PDEs and FBSDEs. We show that for the benchmark vulnerable claim there is an analytical solution, and we express it in terms of the Black-Scholes for…
Before the 2008 financial crisis, most research in financial mathematics focused on pricing options without considering the effects of counterparties' defaults, illiquidity problems, and the role of the sale and repurchase agreement (Repo) market. Recently, models were proposed to address this by computing a total valuation adjustment (XVA) of derivatives; however without considering a potential crisis in the market.…
We discuss the binary nature of funding impact in derivative valuation. Under some conditions, funding is either a cost or a benefit, i.e., one of the lending/borrowing rates does not play a role in pricing derivatives. When derivatives are priced, considering different lending/borrowing rates leads to semi-linear BSDEs and PDEs, and thus it is necessary to solve the equations numerically. However, once it can be gua…
Leverage is strongly related to liquidity in a market and lack of liquidity is considered a cause and/or consequence of the recent financial crisis. A repurchase agreement is a financial instrument where a security is sold simultaneously with an agreement to buy it back at a later date. Repurchase agreements (repos) market size is a very important element in calculating the overall leverage in a financial market. The…
Financial markets such as bond, derivatives, and repo markets form networks of interdependent obligations. Existing multilateral netting methods typically trade off the extent of netting against preservation of counterparty exposure: central clearing reallocates exposure to a central counterparty, while trade compression may alter bilateral counterparty relationships. TradeMech is a mechanism for markets in which one…
Cash collateral is perfect in that it provides simultaneous counterparty credit risk protection and derivatives funding. Securities are imperfect collateral, because of collateral segregation or differences in CSA haircuts and repo haircuts. Moreover, the collateral rate term structure is not observable in the repo market, for derivatives netting sets are perpetual while repo tenors are typically in months. This arti…
Applying historical data from the USD LIBOR transition period, we estimate a joint model for SOFR, Fed Funds, and Eurodollar futures rates as well as spot USD LIBOR and term repo rates. The framework endogenously models basis spreads between each of the benchmark rates and allows for the decomposition of spreads. Modelling the LIBOR-OIS spread as credit and funding-liquidity roll-over risk, we find that the spike in …
Artificial transaction generation remains an important source of potential market manipulation on cryptocurrency exchanges, as it may distort reported liquidity and reduce market transparency. This study proposes a diagnostic framework for detecting unusual trading patterns based on complexity and statistical-structure measures derived from high-frequency trade-level data. The analysis considers log-returns, trading …
SOFR is the Secured Overnight Financing Rate, a key benchmark for U.S. dollar funding based on overnight Treasury repo transactions.
Reverse Repo Facility usage shows how much cash is being parked at the Federal Reserve overnight and helps track reserve distribution, collateral demand, and system liquidity conditions.
Repo rates reflect the cost of short-term secured borrowing against collateral and are central to understanding liquidity, Treasury market functioning, and funding stress.
Standing Repo Facility — The Fed backstop for repo market dysfunction and dealer balance-sheet pressure.
Nonfarm Payrolls — The headline US jobs report that routinely moves rates, FX, and equity index volatility.
Feature Store — Centralized repository for model features ensuring consistency between research and production.
Treasury Specialness (Rates).
General Collateral Repo (Rates).
Term Repo (Rates).
Tri Party Repo (Rates).
Sponsored Repo (Rates).
Reverse Repo Facility (Rates).
CAT Reporting (Systems).
Position Reporting Threshold (Systems).
FATCA CRS Reporting (Systems).
Haircut Spiral (Liquidity).
On the Run Specialness — Scarcity of the current coupon in repo creating special rates.
Commodity Inventory Financing — Repo-like financing of physical stocks linking curve to rates.
Repo Specialness US — Market or funding liquidity stress and intermediation concept.
Repo Specialness Euro Area — Market or funding liquidity stress and intermediation concept.
Repo Specialness UK — Market or funding liquidity stress and intermediation concept.
Repo Specialness Japan — Market or funding liquidity stress and intermediation concept.
Repo Specialness China — Market or funding liquidity stress and intermediation concept.
Repo Specialness EM Asia — Market or funding liquidity stress and intermediation concept.
Repo Specialness LatAm — Market or funding liquidity stress and intermediation concept.
Repo Specialness CEEMEA — Market or funding liquidity stress and intermediation concept.
Repo Specialness Canada — Market or funding liquidity stress and intermediation concept.
Repo Specialness Australia — Market or funding liquidity stress and intermediation concept.
Repo Specialness risk-on — Market or funding liquidity stress and intermediation concept.
Repo Specialness risk-off — Market or funding liquidity stress and intermediation concept.
Repo Specialness tightening — Market or funding liquidity stress and intermediation concept.
Repo Specialness easing — Market or funding liquidity stress and intermediation concept.
Repo Specialness stagflation — Market or funding liquidity stress and intermediation concept.
Repo Specialness reflation — Market or funding liquidity stress and intermediation concept.
Repo Specialness disinflation — Market or funding liquidity stress and intermediation concept.
Repo Specialness liquidity-crisis — Market or funding liquidity stress and intermediation concept.
CAT Reporting (Systems).
Commodity Inventory Financing — Repo-like financing of physical stocks linking curve to rates.
FATCA CRS Reporting (Systems).
Feature Store — Centralized repository for model features ensuring consistency between research and production.
GC Repo 1M (Rates).
GC Repo 1Y (Rates).
GC Repo 2Y (Rates).
GC Repo 3M (Rates).
GC Repo 5Y (Rates).
GC Repo 6M (Rates).
GC Repo 7Y (Rates).
General Collateral Repo (Rates).
Nonfarm Payrolls — The headline US jobs report that routinely moves rates, FX, and equity index volatility.
On the Run Specialness — Scarcity of the current coupon in repo creating special rates.
Position Reporting Threshold (Systems).
Repo rates reflect the cost of short-term secured borrowing against collateral and are central to understanding liquidity, Treasury market functioning, and funding stress.
Repo Specialness Australia — Market or funding liquidity stress and intermediation concept.
Repo Specialness Canada — Market or funding liquidity stress and intermediation concept.
Repo Specialness carry — Market or funding liquidity stress and intermediation concept.
Repo Specialness CEEMEA — Market or funding liquidity stress and intermediation concept.
Repo Specialness China — Market or funding liquidity stress and intermediation concept.
Repo Specialness disinflation — Market or funding liquidity stress and intermediation concept.
Repo Specialness easing — Market or funding liquidity stress and intermediation concept.
Repo Specialness EM Asia — Market or funding liquidity stress and intermediation concept.