By Julia Chong

Members at a recent Basel Committee on Banking Supervision (BCBS) meeting discussed a key topic: vulnerabilities in the government bond-backed repo market.

Building on a February 2026 report issued by the Financial Stability Board (FSB) which flagged the involvement of repo markets in several recent episodes of stress, the BCBS noted that its own Guidelines for Counterparty Credit Risk Management, issued in December 2024, should help mitigate potential risks and ongoing monitoring of the guideline’s implementation is necessary.

Vigilance is needed as banking’s exposure to non-bank financial intermediaries (NBFI) continues to be a cause for concern. Banking Insight‘s December issue, Is Private Credit Bubbling Over? spotlighted the growing vulnerabilities stemming from banks’ interlinkages with a type of NBFI, private credit. With its growing exposure to repurchase agreements (repos) – a different type of NBFI – it is necessary for bankers to understand the susceptibility of the sector to counterparty risks and the implications for financial stability.

Anatomy of a Repo

Repos are short-term loans where institutional borrowers (e.g. hedge funds, banks, mutual funds) pledge a form of collateral to borrow cash from lenders (e.g. financial institutions, pension funds, corporates with excess monies) with an agreement to repurchase the collateral at a predetermined price at a specified date. As a financial product, it gives significant flexibility to counterparties – faster deal turnaround; broad reuse of the collateral in the event the borrower defaults (e.g. secure cash through another repo or use for margin calls); and, in some jurisdictions, repo transactions are exempted from automatic stay under bankruptcy.

In this way, the repo market is an essential component of debt markets, ensuring liquidity to sovereign notes, efficiently facilitating the transmission between real money and debt markets.

It is flexibly structured so that repo transactions can be either centrally cleared, bilaterally, or settled through a third-party custodian. Tenors range from overnight to more than one month with approximately 80% of outstanding repo backed by government bonds, such as US Treasury bills, gilts, Eurobonds, or Japanese bonds. More recent developments include tokenised repos with some market players and authorities exploring the use of distributed ledger technology to automate repo transactions on an intraday basis.

The repo market is steadily growing. The International Capital Market Association’s European Repo Market Survey published in March 2026 reported that the total value of repos and reverse repos outstanding in the economic region as at 10 December 2025 hit a record high of EUR137 trillion, a 9.8% increase from its June 2025 figure and 24.6% higher than the year prior. In comparison, the global repo market in 2016 stood at just USD8.8 trillion. The FSB report, Vulnerabilities in Government Bond-backed Repo Markets, estimated that approximately 80% of all outstanding repos were backed by government bonds as at end December 2024.

The growing importance of repo markets corresponds to their increased involvement in several events that have landed financial institutions under the regulatory microscope (see Resilience Means Learning from Past Upheavals).

This growing interconnectedness has led the FSB to classify banking sector vulnerabilities into two broad categories:

+  Structural vulnerabilities.
These involve liquidity and funding as participants often turn to repo markets to obtain cash.

An imbalance between the demand and supply of repo funding can propagate shocks to asset markets and increase credit risk. Any build-up of leverage beyond acceptable levels can magnify losses and propagate shocks through the financial system.
There is also rehypothecation (when a lender reuses a collateralised government bond to obtain financing with other market participants), which contributes towards the build-up of systemic leverage.

Finally, using central clearing makes repo an attractive instrument due to its economies of scale, but an outage would significantly impact the repo market, spilling over to the broader financial system.

+ Interlinkages and contagion.
The strong links between repo markets and government bonds mean that any shock to the former could lead to contagion in the latter.

Credit-related vulnerabilities arising from counterparties to repo transactions as well as international spillovers create the potential for strains to be propagated between jurisdictions.

The Jury is Still Out

Like all other financial instruments, repos reflect the changing risk appetites of its players – borrowers, lenders, and intermediaries. For instance, in the months succeeding the Global Financial Crisis, banks were reluctant to use their balance sheets for repo market intermediation. This was partly due to more cautious post-crisis attitudes as well as stricter regulatory standards, such as the leverage ratio and capital surcharges for global systemically important banks. However, with the shift of major governments towards deregulating the financial sector, these regulatory guardrails hold softer sway.

Coupled with the distractions brought about by geopolitical and economic upheavals, expectations steering by global standard setters will likely yield limited results. It stands to reason that authorities cannot effectively guide good behaviour when deregulation is still on the cards.

Under these circumstances, the golden test is whether markets can exert a sense of self-discipline and course correct independently. It remains to be seen whether banks will prioritise systemic resilience over quarterly earnings or choose to make hay while the sun shines, no matter the cost.

Resilience Means Learning from Past Upheavals

Repo markets have played a role in several stress episodes in recent years.

2019 US Repo Market Spike

The US repo market unexpectedly experienced a severe spike in rates on 16 and 17 September 2019. The episode seems to have been the result of a sudden, sharp demand-supply mismatch in the repo market.

On the supply side, there was a pullback in funding by money market funds that appears to be partly related to withdrawals from those funds by corporates to meet a tax payment deadline. Bank reserves were also relatively low and had been further depleted by the settlement of newly issued [US] Treasury securities and tax payments by banks’ corporate depositors. Borrowing demand, however, remained strong, forcing cash borrowers to pay much higher rates to obtain funding. In addition, some participants were not able to trade in all segments of the repo market (bilateral, tri-party, centrally cleared) and this may have added to the strains as participants could not offset the imbalances in supply and demand.

Central bank liquidity support was important in restoring market functioning, with the Federal Reserve lending cash through its open market operations, adding to central bank reserves.

2020 Dash for Cash

The second episode of stress affecting repo markets was part of the broader ‘dash for cash’ in the global financial system following the onset of the COVID-19 pandemic. This manifested itself in repo markets as an acute demand for cash. Surges in central clearing counterparties (CCP) margin calls were one of the factors behind this spike in liquidity demand.

In the US, and to some extent the UK, participants turned to repo markets to obtain cash by pledging their securities, although this led to a deterioration in repo market functioning and significantly higher repo rates. In the euro area and Japan, the demand for liquidity led intermediaries to ‘dash for collateral’ that could be used to borrow US dollars from central bank facilities. A number of emerging market repo markets were also affected in the episode. In South Africa, for example, there was a 25% increase in repo trading.

Another way in which the repo markets were involved in this episode was through hedge funds that had used repo markets to fund leveraged positions in US Treasuries via the cash-futures basis trade. Increased haircuts (a percentage reduction applied to the market value of a collateral) and rates on repo borrowing, in combination with higher margin requirements from CCPs on US Treasury futures positions and a widening in the cash-futures spread, sparked an unwinding of the basis trades. Fire sales of US Treasuries added to volatility in the market, leading to an unusual situation where there was an increase in Treasury yields in a period of stress. Research has found that hedge funds sold more than USD200 billion of Treasury securities in that episode, with about half of that attributed to the unwinding of leveraged trading strategies.

2022 UK LDI Episode

This episode began in September, with unprecedented volatility in the UK government bond market in the wake of the announcement of an expansionary fiscal policy. This volatility triggered margin calls and higher haircuts for liability-driven investment (LDI) funds that increased their leverage by borrowing in gilt repo markets to finance long-dated gilt purchases. Some LDI funds had insufficient liquidity (or collateral) to pay these margin calls, and so were forced to sell gilts to raise liquidity and deleverage. This selling pressure amplified gilt market volatility and prolonged the stress. Spreads were volatile throughout the episode.

Pressures eased after the Bank of England announced temporary and targeted purchases of gilts and temporarily expanded the range of eligible collateral for their repo facility.

2022 Euro Area Repo Market Volatility

Euro area repo markets experienced a period of stress around the same time, though for different reasons. This episode was closely tied to the European Central Bank’s (ECB) interest rate normalisation process, when policy rates moved back into positive territory after nearly eight years. The efficient functioning of repo markets was significantly challenged during this time, largely due to the pronounced mismatch between cash and collateral availability. This imbalance was primarily driven by the ECB’s large-scale asset purchase programmes, which had led to a scarcity of highly rated euro area government bonds while leaving the financial system awash with liquidity.

Compounding this issue, pronounced volatility in government bond markets further increased the demand for highly rated government bonds to meet margin requirements at CCPs. Collateral lending activity on trading platforms dropped significantly, creating one-sided markets, deteriorating repo market liquidity and pushing repo spreads further into negative territory. The stress was particularly acute in short-tenor repo rates, which experienced the greatest disruption during this period. In response to mounting pressures, authorities took targeted actions, including measures to expand collateral availability, adjust monetary policy tools, and enhance the terms of lending programmes, with various public institutions also helping to ease market tensions.

Julia Chong writes for Akasaa, a strategic consultancy and publishing firm. From its bases in London, Kuala Lumpur, and Sharjah, it delivers Asia-informed insight to a global audience.