The Federal Reserve Board published a research paper, “Rewiring repo,” modelling the repo market as a networked structure in which dealers compete for funding in a decentralized over-the-counter market while also accessing a centrally cleared interdealer segment. The paper finds that this market “wiring,” combined with imperfect competition in dealer funding, can generate inefficiencies and instability. The model separates supply and demand drivers and is used to estimate supply and demand elasticities. Using these estimates, the authors attribute the September 2019 repo market instability to a large supply shock hitting inelastic dealer funding demand, with the impact amplified by strategic interactions among dealers. The paper also evaluates potential interventions to support market functioning and efficiency, including the Standing Repo Facility.
Federal Reserve Board 2025-02-01
Federal Reserve Board research links September 2019 repo market stress to a supply shock amplified by strategic dealer funding behavior
The Federal Reserve Board released "Rewiring repo," analyzing the repo market's networked structure and inefficiencies from imperfect competition in dealer funding. The study attributes the September 2019 repo market instability to a supply shock affecting inelastic dealer funding demand, worsened by strategic dealer interactions. It also assesses interventions like the Standing Repo Facility to enhance market efficiency.