DP15782 (In)efficient repo markets
|Author(s):||Tobias Dieler, Loriano Mancini, Norman Schürhoff|
|Publication Date:||February 2021|
|Keyword(s):||asymmetric information, Central clearing, Collateral, Financial Stability, funding run, guarantee fund, novation, repo market|
|JEL(s):||G01, G14, G21, G28|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=15782|
Repo markets trade off the efficient allocation of liquidity in the financial sector with resilience to funding shocks. The repo trading and clearing mechanisms are crucial determinants of the allocation-resilience tradeoff. The two common mechanisms, anonymous central-counterparty (CCP) and non-anonymous over-the-counter (OTC) markets, are inefficient and their welfare rankings depend on funding tightness. CCP (OTC) markets inefficiently liquidate high (low) quality assets for large (small) funding shocks. Two innovations to repo market design contribute to maximize welfare: a liquidity-contingent trading mechanism and a two-tiered guarantee fund.