March 9 (Reuters) - A key source of short-term loans for banks and Wall Street may be cheaper if they are done through central counterparties instead of directly between themselves or with investors, a U.S. financial research agency said on Thursday.
Banks and security dealers borrow from the $2.2 trillion repurchase agreement (repo) market where they pledge a security, typically a Treasury bond, as collateral and agree to buy it back at a set time and price.
During the global credit crisis, the repo market was roiled when investors refrained from making loans to banks and dealers. Regulators tightened rules in response to the crisis but they hurt liquidity and raised the cost of using repos, the Office of Financial Research said in a research note published on Thursday.
One method of lowering repo costs would be to increase the use of central counterparties (CCPs) which assume the credit risk of bilateral transactions. They act as buyers to all sellers and sellers to all buyers, according to the research paper.
“CCPs for dealer-to-nondealer repos may be attractive to dealers if netting results in smaller balance sheets and cost savings,” the agency’s analysts Viktoria Baklanova, Ocean Dalton and Stathis Tompaidis wrote in the research paper.
Netting involves the offset of buying and selling of similar securities between two or more trading participants.
Reporting by Richard Leong; Editing by Chizu Nomiyama