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Trading Relationships in the OTC Market for Secured Claims: Evidence from Triparty Repos

Song Han and Kleopatra Nikolaou

No 2016-064, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We use a new panel data set on intraday transactions of triparty repos (TPR) to study trading relationships in the over-the-counter market. We test the prediction that search frictions lead to relationship formation. We find that TPR trading parties form relationships with a broad number of counterparties but tend to focus their transaction volumes on only a small set of counterparties. We also find that having stable relationships and broader interactions across other funding markets positively shapes the relationships of investors with dealers in the TPR market. Finally, our results suggest that relationships affect the likelihood of a trade and terms of trade and help buffer demand and supply shocks to liquidity. Specifically, the Fed's Reverse Repurchase (RRP) exercise draws funds away from lenders in the TPR market, effectively generating a negative shock to the supply of funds for dealers. Meanwhile, Treasury auctions introduce a positive shock to the demand for funds by dealers. We find that in both cases, shocks are absorbed better by trade partners with stronger relationships.

Keywords: tri-party repos; OTC markets; Trade relationships; RRP exercise; Treasury Auctions; Search frictions (search for similar items in EconPapers)
JEL-codes: E58 G12 G24 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2016-03
New Economics Papers: this item is included in nep-mac and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2016-64

DOI: 10.17016/FEDS.2016.064

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