FSB report on vulnerabilities in government bond-backed repo markets

The Financial Stability Board (FSB) has published a report highlighting vulnerabilities in government bond-backed repurchase agreement (repo) markets with recommendations for authorities to address them. The FSB explains that although repo markets are essential for short term funding, collateral sourcing and liquidity management across the financial system, their structure can also amplify systemic risk. Identified vulnerabilities include: (i) facilitating the build-up of leverage in the financial system; (ii) the potential for heightened demand and supply imbalances during periods of stress, particularly if repo lenders are unwilling or unable to provide funding to meet spikes in liquidity demand; and (iii) high concentrations across various dimensions, which could lead to market disruptions in the event of failures.

The measures suggested in response include closing data gaps, strengthening surveillance capabilities and considering the FSB's recommendations on leverage in non-bank financial intermediation (NBFI) and the Global Securities Financing Transactions exercise, as well as other relevant international standards, to address vulnerabilities related to liquidity imbalances and leverage.

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