Securities financing and bond-market liquidity

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Abstract

Securities-financing transactions, including repurchase agreements and securities-lending agreements, are essential to market liquidity. They enable dealers to borrow and reuse securities efficiently or to fund purchases of securities. The importance of the securities-financing market for bonds is growing in Canada. Monthly trading volume in the 5-year benchmark Government of Canada bond increased from 5 times its quantity outstanding in 2010 to over 10 times that amount in 2015. The nature of the link between the securities-financing market and bond market liquidity is likely changing as a result of financial sector reforms and the low interest rate environment. The development of the repo central counterparty in Canada and the implementation of the Basel III regulatory framework are changing the incentives for conducting specific types of securities-financing transactions. For example, the new liquidity requirements provide more incentive to conduct longer-maturity transactions. The current low level of the overnight interest rate also diminishes the incentives for timely settlement of securities-financing transactions.

Figure 2: The low price impact of retail trades on NYSE’s RLP compared to the main order flow

Citation

Fontaine, J. S., Garriott, C., & Gray, K. (2016). Securities financing and bond market liquidity. Bank of Canada Financial System Review, 39-45.

@article{fontaine2016securities,
  title={Securities financing and bond market liquidity},
  author={Fontaine, Jean-S{\'e}bastien and Garriott, Corey and Gray, Kyle},
  journal={Bank of Canada Financial System Review},
  pages={39--45},
  year={2016}
}