By Viktoria Baklanova, Ocean Dalton, and Stathis Tompaidis
Recent regulatory changes have raised the cost of activity in the repurchase agreement (repo) market for bank-affiliated dealers. Many transactions between dealers are centrally cleared. Expanding the use of central clearing to transactions between dealers and nondealers could reduce costs and improve market access for market participants. But what are the trade-offs? Data from the Office of Financial Research’s interagency bilateral repo data collection pilot indicate that dealers could reduce their risk exposures if repo transactions by nondealer clients were centrally cleared. But the potential risks that central counterparties themselves face from larger exposures would also increase.