Repo markets : draft background note

This note on repo markets is part of a series of background notes produced under Gemloc Advisory Services Program as a by-product of its strategy to support the development of liquid local currency bond markets. Selected topics have been a key focus in the areas of work of the Advisory Services because of their catalytic impact on debt market development. They include primary market organization through primary dealers and liability management; repo markets; price dissemination and clearing and settlement arrangements. Repo markets are an essential component of liquid Government debt markets, acting as a transmission belt between money and debt markets, as well as serving to conduct key functions for the efficient operation of debt markets. These include, among others, credit risk management, funding debt portfolios, playing the yield curve, and covering short positions and settlement fails. The hybrid nature of a repo between a collateralized loan and a full transfer of ownership makes it a very versatile instrument for a broad range of market participants with very different business models. However, this is at the same time the reason for its complexity. This note addresses the legal, structural, accounting, tax, regulatory and infrastructure factors that are decisive for repo market development. The legal and infrastructure factors that underpin repo markets functionality are evolving ones and may be different depending on the country. The perspective adopted in this note intends to provide a balanced account of both the conceptual issues in each topic and relevant country cases, with the objective of providing policy makers with analytical tools to address their country specific context.