The Canadian repurchase agreements (repo) market is improving in its preparedness to weather a future financial crisis, according to new research. But there is work to be done by the securities industry, policy-makers and financial market infrastructure firms to improve the way this key financing market functions.
A report from the Investment Industry Association of Canada (IIAC), based on its survey of both buy-side and sell-side firms, indicates that the repo market in Canada is generally viewed as working well by industry participants. But the research found areas needing improvement.
In particular, the report states, the Canadian repo market is being affected by several factors, including global regulatory reforms made in response to the financial crisis; the prolonged low interest rate-environment; and compressed margins for Canadian banks that have negatively affected the health of the Canadian market by increasing costs and discouraging participation in the market for certain players.
“These factors, while not all unique to Canada, have contributed to a narrowing of the repo market in Canada, resulting in imbalances that jeopardize the ability of repo to provide predictable short-term liquidity and do so at an effective price,” the report states.
To address this issue, the report points to several measures that industry participants recommend to enhance the health and efficiency of the Canadian market.
For example, the report recommends that policy-makers ensure that the implementation of global reforms is tailored to the Canadian market; that participation in the central clearing platform for repos be broadened to produce efficiencies and ensure market liquidity; and that Canada should “explore the development of a tri-party repo market to simplify some of the daily transactional tasks and entice new participants into the market.”