The Dealer-to-Client Repo Market: A Buoy on a Swaying Sea
Greg Adams, Evan Dudley, Jean-Sébastien Fontaine, Sofia Tchamova, Andreas Uthemann
Beginning in 2024, CORRA began to drift above the Bank’s target. Not sharply, not suddenly—but persistently. This benchmark rate hovered just a little higher than expected day after day, suggesting a shift in the current. To passengers, the ride felt stable: inflation was easing, markets were functioning and the vessel stayed on course. But the buoy—CORRA—was telling its own story, one of underlying tension and changing conditions beneath the surface. To address the spread between CORRA and its target, the Bank began intervening more actively. During that period, for a time, the Bank supplied more than $8 billion every day in funds through repurchase agreement (repo) operations.
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Empirically, this shift in D2C rates can explain the upward drift in CORRA in 2024. If we remove from the calculations all long repo positions of hedge funds starting in the summer of 2024, then the re-computed CORRA deviations decrease from around 5 basis points (bps) above the policy rate to 2.5 bps below the policy rate, on average. In contrast, excluding trades from dealers holding the larger share of settlement balances shows no effect on the benchmark rate. This underscores the impact of client transactions as well as the importance of looking beyond the D2D market.
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Our results have important implications for policies that aim to bring CORRA closer to or in line with the Bank’s target rate. CORRA includes overnight repo transactions involving GoC bonds as collateral between banks or between banks and their clients. The Bank of Canada can control the quantity of outstanding settlement balances, but it has no direct influence on the bargaining power exercised by dealers in transactions with clients nor on dealer balance sheet constraints. The Bank can offset the effects that demand for settlement balances might have on CORRA by setting the total amount of settlement balances in the payment system. However, insulating CORRA from the effects of bargaining power and balance sheet constraints on client markups is more complex. Mitigating the influence of these channels may require changes to the design and infrastructure of the Canadian money market, which could involve costs, inefficiencies and other potential side effects. This creates several trade-offs against the benefits of limiting variations in CORRA.
The full paper is available here.