Central clearing and the pricing of specialness in repo markets

Julian Metzler, Piotr Danisewicz, Tobias Dieler, Loriano Mancini and Francesco Mazzari

No 3214, Working Paper Series from European Central Bank

Abstract: Repo markets clear either bilaterally over the counter (OTC) or through central counterparties (CCPs), which differ in how counterparty risk is priced. In bilateral markets, repo rates reflect borrower-specific risk, while CCP clearing pools counterparties and applies a common pricing rule. We develop a model of security-driven repo in which repo rates are non-linear in borrower risk. As a result, averaging borrower-specific OTC prices yields more negative rates than pricing the pooled borrower in CCP markets. The model predicts that the CCP–OTC specialness gap compresses during periods of counterparty uncertainty and varies with borrower and collateral characteristics. Using transaction-level data from the euro-area interbank repo market around the March 2020 COVID-19 shock, we find evidence consistent with these predictions. Our results show that central clearing dampens specialness in normal times but stabilizes repo pricing during stress. JEL Classification: D47, D82, G14, G15, G21

Keywords: asymmetric information; collateral risk; counterparty risk; interbank markets; uncertainty (search for similar items in EconPapers)
Date: 2026-04
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