How do secured funding markets behave under stress? Evidence from the gilt repo market

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 26 February 2021

Staff Working Paper No. 910

By Anne-Caroline HΓΌser, Caterina Lepore and Luitgard Veraart

We examine how the overnight gilt repo market operates during three episodes of liquidity stress, using novel transaction-level data on repurchase agreements on gilts. Using network analysis we document that the structure of the repo market significantly changes during stress relative to normal times, with a focus on how sectors adjust volumes, spreads and haircuts in their repo transactions. We find several common patterns in the two most recent stress episodes (the US repo turmoil in 2019 and the Covid-19 crisis in 2020): a preference for dealers and banks to transact in the cleared rather than the bilateral segment of the market, increased usage of the market by hedge funds and central counterparties increasing their reinvestment of cash margin into reverse repo.

How do secured funding markets behave under stress? Evidence from the gilt repo market

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