The European Central Bank published a working paper examining how bilateral over-the-counter (OTC) versus centrally cleared (CCP) repo trading affects the pricing of “specialness” for security-driven repos in the euro-area interbank market. It finds that, for the same securities, repo rates are typically more negative in OTC trading than in CCP-cleared trading in normal conditions, but that this CCP–OTC gap compressed sharply during the March 2020 COVID-19 uncertainty shock as CCP borrowing costs rose relative to OTC by about 6 basis points. The paper proposes a mechanism based on how counterparty risk is reflected in prices across venues: OTC pricing can condition on borrower identity, while CCP clearing pools counterparties and applies a common pricing rule. In a model where repo rates are non-linear in borrower default risk, “averaging borrower-specific OTC prices” differs from “pricing the pooled borrower” in CCP markets, producing systematically more negative OTC rates in normal times and a smaller differential during periods of heightened counterparty uncertainty. Using confidential transaction-level data from the Eurosystem’s Money Market Statistical Reporting dataset around the World Health Organization’s pandemic announcement, the authors report heterogeneous effects consistent with the model: the post-shock compression is weaker for riskier borrowers (proxied by non-performing loan ratios and credit default swap spreads) and stronger for high-quality collateral (proxied by core euro-area government bonds), implying that lower-quality borrowers benefit relatively more from CCP pooling while safe collateral becomes relatively more expensive to source through CCPs during stress.
European Central Bank 2026-04-02
European Central Bank working paper links central clearing to lower repo specialness and a roughly 6 basis point compression of CCP–OTC pricing during March 2020 stress
The European Central Bank published a working paper on how bilateral over-the-counter versus centrally cleared repo trading shapes the pricing of “specialness” in euro-area security-driven repos. It finds repo rates for the same securities are typically more negative over the counter than centrally cleared in normal times, but this gap narrowed sharply during the March 2020 COVID-19 shock as centrally cleared borrowing costs rose by about 6 basis points relative to over the counter. The paper attributes this to differences in how counterparty risk is priced across venues and shows, using confidential transaction-level data, that the post-shock compression was weaker for riskier borrowers and stronger for high-quality collateral.