Repo market got a facelift in the 1980s

Repurchase agreements navigated several crises in the 1980s to become the critical player in the financial markets that they are today.

That history is reviewed by New York Fed vice president Kenneth D. Garbade in a May 2006 report.

From that report:

Repurchase agreements, or repos, play an important role in U.S. securities markets. Securities dealers use repos to finance market-making and risk  management activities, and the agreements provide a safe and low-cost way for mutual funds, corporations, and others to lend both money and securities. At the end of 2004, primary dealers with a trading relationship with the Federal Reserve Bank of New York were borrowing a total of $3.2 trillion on repos and lending a total of $2.4 trillion. Repurchase agreements also play an important role in the implementation of monetary policy—the Federal Reserve uses them to dampen transient fluctuations in the supply of reserves available to the banking system. In 2004, the New York Fed’s Trading Desk arranged 192 overnight repos, with an average size of $5.9 billion.

Repos have a long history. Federal Reserve Banks used them to extend credit to member banks as early as 1917, when a wartime tax reduced the  attractiveness of rediscounting commercial paper. During the 1920s, the New York Fed used repurchase agreements to extend credit to nonbank dealers in bankers’ acceptances to encourage the development of a liquid secondary market for acceptances. Repos fell into disuse during the Great Depression and World War II, but reappeared following the restoration of Federal Reserve control of monetary policy in 1951.

Contracting conventions for repurchase agreements hardly changed between the revival of repos in the early 1950s and 1981. However, they began to change dramatically in 1982.

This paper is the story of those changes.


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