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What is the repo market? Why does it matter?

Bevan Cook

The repurchase (‘repo’) market was a key channel through which the Global Financial Crisis was transmitted. With activity in these markets now recovering, pressure is mounting for regulators elsewhere to increase the resilience of repo markets so that they become a more stable source of funding during periods of market stress. New Zealand’s repo market has not suffered from the same kind of issues, primarily because financial institutions here do not use repos to gain leverage. Furthermore, the small size of the New Zealand repo market and the dominance of low-risk collateral have meant that it is less likely to transmit shocks to other markets. Nevertheless, the Reserve Bank continues to monitor local repo market developments carefully. This article outlines the functioning of repo markets, as well as recent developments both offshore and in New Zealand, and touches lastly on the outlook for these markets.