- • The new Money Market Funds regulation37 , which was first drafted by the European Commission in November 2013, was ratified in April 2017 by the European Parliament. It creates pressures on the demand for short term assets, to meet daily and weekly liquidity criteria. It also imposes restrictions in the use of repurchase agreements, as MMFs (which encompass UCITS as well as AIFs38 ) can only invest in repos up to a limit of 10% of their assets.
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Klee, E. C., Senyuz, Z., and Yoldas, E. (2016). Effects of Changing Monetary and Regulatory Policy on Overnight Money Markets. Finance and Economics Discussion Series 2016-084, Board of Governors of the Federal Reserve System (U.S.). Koijen, R. S., Koulischer, F., Nguyen, B., Yogo, M., et al. (2017). Euro-area quantitative easing and portfolio rebalancing. American Economic Review, 107(5):621–627.
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- Mutual Funds usually re-use the collateral they receive in the course of their securities lending and derivatives positions (the collateral mitigates the counterparty risk from those operations). The UCITS36 V regulation of mutual funds, which was enforced in March 2016, restricts the way they can re-use the collateral they receive. Re-use is permitted only if a collateral asset of at least the same quality is borrowed in exchange. Such a regulation is thus likely to decrease supply of collateral on the repo market. A.3 Restrictions or costs on repo leverage Other regulations impose a restriction or a cost on leverage, which can deter financial institutions from trading repo, because repo transactions increase bank’s balance sheets.
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Pelizzon, L., Subrahmanyam, M. G., Tomio, D., and Uno, J. (2018). Central bank-driven mispricing. SAFE Working Paper Series 226, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
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Stein, J. C. (2012). Monetary Policy as Financial Stability Regulation. The Quarterly Journal of Economics, 127(1):57–95. Vari, M. (forthcoming). Monetary policy transmission with interbank market fragmentation. Journal of Money, Credit and Banking. A Regulation and the repo market Regulations of financial institutions and financial markets may impact the repo market in many ways: by incentivizing financial institutions and other market participants to hold “safe assets†on balance sheets, by limiting collateral reuse, by restricting or penalizing repo leverage. In the following sections, we detail some of these regulations and their likely impact on the repo market functioning. A.1 Regulatory demand of high-quality liquid assets Some regulatory constraints incentivize financial intermediaries to hold bonds of the highest quality (in terms of credit and liquidity) and thus might prevent them from lending these bonds out on the repo market.