Abstract
The repo market is an essential source of short-term funding for broader trading activity across modern financial markets. It is a market created to circumvent the unintended effects of regulation, and the size and composition of repo markets across the world reflect regulatory policy decisions and traders’ needs. Many variations of a repo contract exist, but they share a distinct set of common features. The amount and cost of repo financing can change dramatically in a short period of time to accommodate time-varying demand for market liquidity, but that flexibility may not always be a stabilizing factor. When repo markets function well, they help other markets function smoothly and can give insight into the cost of trading and the demand for securities or their derivatives. However, when the repo market ceases to function it can be a systemic risk that threatens all financial markets.
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