Lifting The Veil On The U.S. Bilateral Repo Market

The repurchase agreement (repo), a contract that closely resembles a collateralized loan, is widely used by financial institutions to lend to each other. The repo market is divided into trades that settle on the books of the two large clearing banks (that is, tri-party repo) and trades that do not (that is, bilateral repo). While there are public data about the tri-party repo segment, there is little to no information on the bilateral repo segment.

 

In this post, we update a methodology we developed earlier to estimate the size and composition of collateral posted for bilateral repos, and find that U.S. Treasury securities are the dominant form of collateral for bilateral repos. This new finding implies that the collateral posted for bilateral repos is of higher quality than the collateral posted for tri-party repos.

The idea behind our estimate is simple: Primary dealers provide information about their total repo activity by type of collateral, but this information does not distinguish between the bilateral and tri-party repo segments. We also have data on the collateral posted in tri-party repo. For each asset class we consider, we can deduct the activity in the tri-party repo (including the gross amounts traded in GCF Repo®) from the activity in the overall repo figure reported by primary dealers to obtain an estimate of the amount of collateral financed in the bilateral repo segment. In this post, we focus on dealers’ repo activity, but a similar approach can be taken to estimate dealers’ reverse repo activity in the bilateral repo segment.

To obtain these estimates, we exploit the fact that since April 2013, primary dealers report more details about the collateral backing their financing transactions. Before the most recent revisions to the Federal Reserve FR2004 reporting form (for government securities dealers), repo activity by primary dealers was aggregated across all collateral classes, which limits the usefulness of the data for analyzing trends in repo collateral.

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