Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/173378
Authors: 
Fontaine, Jean-Sébastien
Hately, James
Walton, Adrian
Year of Publication: 
2017
Series/Report no.: 
Bank of Canada Staff Discussion Paper 2017-3
Abstract: 
This paper investigates how a low or negative overnight interest rate might affect the Canadian repo markets. The main conclusion is that the repo market for general collateral will continue to function effectively. However, changes to market conventions - such as the introduction of a charge for settlement fails - or other institutional changes may be required so that the repo market for specific collateral continues to support liquidity on the secondary market for government bonds. The historical experience shows that the special repo market in other jurisdictions can function effectively even if the overnight rate is negative. Closer examination suggests what specific circumstances can lead to persistent settlement fails in the specific collateral repo market. Specifically, the combination of (i) low or negative interest rates, (ii) large aggregate short positions in bonds, and (iii) economic or policy surprises may lead to persistent settlement fails.
Subjects: 
Financial markets
interest rates
market structure and pricing
JEL: 
D4
G10
G12
Document Type: 
Working Paper

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