• BoE issued staff working paper, Collateral demand in wholesale funding markets.

Overview

• Repo markets are systemically important funding markets, but also used by firms to obtain the assets provided as collateral, do these 2 functions complement each other.
• Authors build and estimate model of repo trade between heterogeneous firms, and find answer is no, volumes and gains to trade would be higher absent collateral demand.
• This appears to be because, on average, the firms that are in need of funding are also those that value the collateral to speculate or hedge interest rate risk.
• The results have implications for policies that affect collateral demand in repo markets, including rules on short selling.