By Samuel J. Hempel, R. Jay Kahn, Robert Mann, and Mark E. Paddrik
The U.S. repurchase agreement (repo) market plays a pivotal role in the U.S. financial system. This brief provides an in-depth look into how repo dealers manage cash and collateral flows across the market. Using a unique combination of data, this analysis shows that dealers relend 65% of what they receive as collateral in other transactions. This finding highlights the U.S. financial system’s reliance on collateral circulation. Dealers are exposed to counterparty, collateral, and maturity risk in providing this service. However, they are compensated for these risks through the net interest margin that they earn. Dealers receive higher compensation when collateral is less liquid and when they borrow from more creditworthy counterparties than those they lend to.
The full paper is available at https://www.financialresearch.gov/briefs/files/OFRBrief-24-07-repo-market-intermediation.pdf