Bank of England Staff Working Paper No. 1,026
BoE recently published a working paper titled ‘The potential impact of broader central clearing on dealer balance sheet capacity: a case study of UK gilt and gilt repo markets’ (Bank of England Staff Working Paper No. 1,026).
This paper is an interesting read and points to the thinking of policy makers with regard to benefits, primarily of repo clearing, on dealers’ capacity to intermediate financial markets by increasing the netting of buy and sell trades, thereby reducing the impact of repo trading on balance sheets and capital ratios. Although these issues are important in their own right, they are even more critical at the times of financial market stress.
The paper contains lots of data, analysis of which lead the authors to conclude that, if comprehensive central clearing had been introduced to the gilt repo markets, the gilt repo exposures on UK dealers’ balance sheets would have been reduced by about 40%. In addition, hypothetical ‘standardisation’ of term repo maturity dates, so that they fell on the same day of the week, would lead to overall reduction of dealer balance sheet utilisation by a total of about 60%.
Bank of England Staff Working Paper No. 1026
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