March 9 A key source of short-term loans for
banks and Wall Street may be cheaper if they are done through
central counterparties instead of directly between themselves or
with investors, a U.S. financial research agency said on
Banks and security dealers borrow from the $2.2 trillion
repurchase agreement (repo) market where they pledge a security,
typically a Treasury bond, as collateral and agree to buy it
back at a set time and price.
During the global credit crisis, the repo market was roiled
when investors refrained from making loans to banks and dealers.
Regulators tightened rules in response to the crisis but they
hurt liquidity and raised the cost of using repos, the Office of
Financial Research said in a research note published on
One method of lowering repo costs would be to increase the
use of central counterparties (CCPs) which assume the credit
risk of bilateral transactions. They act as buyers to all
sellers and sellers to all buyers, according to the research
"CCPs for dealer-to-nondealer repos may be attractive to
dealers if netting results in smaller balance sheets and cost
savings," the agency's analysts Viktoria Baklanova, Ocean Dalton
and Stathis Tompaidis wrote in the research paper.
Netting involves the offset of buying and selling of similar
securities between two or more trading participants.
(Reporting by Richard Leong; Editing by Chizu Nomiyama)