The Repo Market Is More Than Mere Plumbing
When the financial system needs a way around new regulations or restrictions, it often finds a friend in repo.
Not exactly accurate.
Photographer: Hulton Archive – Getty Images
The repo market is often described as the “plumbing” of the financial system, especially when it starts to look clogged and in need of the kind of flushing that only the Federal Reserve can provide. It’s an effective metaphor, just not an accurate one.
The history of repo shows that it’s far from the stable system of financial pipes and more like a series of end-runs designed to circumvent government regulations and restrictions. Its latest woes may well be another installment in a decades-long story of regulatory arbitrage.
The standard definition of a repo, or repurchase agreement, is a sale of securities from a borrower to a creditor, with an agreement to repurchase them at a set date in the future for a specified price. It’s akin to a loan, in that the repurchase price covers the original amount and a little more – a kind of “interest” payment.