What’s Going on in the Repo Market?
The role that the repo market plays in the financial system is substantial, somewhat predictable, and conducted mostly in the shadows. Indeed, many people aren’t even aware what the repo market actually is. In its operational obscurity and low-profile public image, it is frequently described as the internal plumbing of the financial system. Each day, the repo market has trillions of dollars worth of cash and Treasury securities flowing through its pipes, traveling between banks and financial firms, ensuring the daily functioning of these institutions. The business of the Repo market is fairly sleepy when it’s running smoothly but it’s when it isn’t that onlookers start taking notice and questioning the structural integrity of the system itself. This is the situation that we currently find ourselves in today.
What even is the repo market exactly?
The term ‘repo’ stands for repurchase agreement. Essentially, banks need to start each day with adequate cash to fund the positions they have on their books. Usually, they lack sufficient reserves to do this. This is why the repo market originally emerged to provide a convenient outlet for banks to access the cash they needed. A typical repo transaction involves a bank handing over some of their U.S. Treasury securities to another firm who is willing to lend out their otherwise stagnant cash…
