Researchers who want information about the US tri-party repo market can turn to the two main clearing banks, The Bank of New York Mellon Corporation (NYSE:BK) and JPMorgan Chase & Co. (NYSE:JPM), but detailed information about the bi-party repo market is much harder to come by. To help fill that gap, Adam Copeland, Isaac Davis, Eric LeSueur and Antoine Martin at the Federal Reserve Bank of New York have been using newly detailed reports required of primary dealers since April 2013 to delve into the bi-party repo market, and they’ve found a startling discrepancy between the two.

Treasuries portion in the repo market

Treasury securities make up 90 percent of the collateral posted in bilateral repo. Other securities, such as agency mortgage-backed securities (MBS), agency debt, corporate bonds, and equities, are posted as collateral in bilateral repo trades, but only to a limited extent,” they write, but “Treasury securities are posted as collateral for roughly 40 percent of tri-party repo trades, about the same share as agency MBS.”

They only have ten months’ worth of data, but the ratio is steady for that period and there’s no reason to think that it was different in the recent past.

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Bi-party repo market favors Treasuries to reduce costs, meet demand

The most obvious reason for the discrepancy is that traders want to keep their costs under control. While there are typically hundreds of US Treasury securities outstanding, there are more than a million outstanding agency MBS. Handling bi-party repo for Treasuries might be manageable, but the added complexity of trying to clear and settle whatever MBS a trader happens to need probably isn’t worth the extra overhead.

But the bi-party repo market may also be driven by financial institutions looking for specific types of collateral. Institutions providing the cash in a tri-party repo trade usually accept a range of possible securities with just a few criteria.

“If a financial institution is looking for a particular piece of collateral, such as an on-the-run Treasury security, then bilateral repos are the more appropriate way to obtain that security compared to tri-party repo,” write Copeland et al.

Bi-party repo market less risky than the tri-party market

One effect of this discrepancy is that the bi-party repo market, the one that is harder to keep tabs on, generally deals with higher quality assets and has less risk than the tri-party repo market, which is a comforting thought. But it also raises questions of whether financial institutions primarily use the two different markets as complements or if they act as substitutes for each other. Unfortunately, the authors “continue to need more data” to answer these questions and more.