Grim repo: clearing touted as saviour for shrinking market
Four clearing houses are working on buy-side repo services – a possible saviour for a market suffocating under the weight of the leverage ratio – but the risk management and operational challenges are severe. Kris Devasabai reports
The repo market is ill. Once the leverage ratio takes effect in 2018, banks operating matched books of borrowed and lent cash will be prevented from fully netting trades, and will be charged capital on a proportion of the total notional. The prospect has already caused the market to shrink by up to 60% in the US, according to one estimate.
There is an obvious cure: a comprehensive clearing
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