A Note on Central Counterparties in Repo Markets

Hajime Tomura

Discussion Papers from Bank of Canada

Abstract: The author introduces a central counterparty (CCP) into a model of a repo market. Without the CCP, there exist multiple equilibria in the model. In one of the equilibria, a repo market emerges as bond dealers and cash investors choose to arrange repos in an over-the-counter bond market. In another equilibrium, the repo market collapses due to aggregate cash shortage for dealers. Introducing a CCP into the repo market blocks the latter equilibrium. This stabilizing effect of a CCP is robust to idiosyncratic default risk of dealers and asymmetric information about the risk.

Keywords: Payment clearing and settlement systems; Financial markets; Financial stability (search for similar items in EconPapers)
JEL-codes: G24 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2012
New Economics Papers: this item is included in nep-ban and nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocadp:12-4

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