Optimal interventions on strategic fails in repo markets

Hiroki Fukai

MPRA Paper from University Library of Munich, Germany

Abstract: A search theoretic model of repurchase agreements is constructed wherein the sellers' incentives to fail to deliver securities are explicitly incorporated. In equilibrium, too many sellers choose to fail relative to the social optimum. Two types of interventions are studied: a fails charge and an interest reset. These interventions improve efficiency by lowering the fraction of sellers who fail and making it easier for buyers to find their counterparties. In extensions of the model, the two types of optimal interventions are differently affected by fundamental variables. Thus, a policymaker needs to carefully distinguish between the workings of the two.

Keywords: fails charge; over-the-counter market; repo interest; repo market (search for similar items in EconPapers)
JEL-codes: D53 G01 G18 (search for similar items in EconPapers)
Date: 2021-01-30
New Economics Papers: this item is included in nep-cwa
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