RBA examines central clearing for bond and repo markets

Australia’s central bank today (July 24) began a consultation on whether to introduce central counterparties (CCPs) to clear transactions in the country’s bond and repurchase markets.

The Reserve Bank of Australia (RBA) indicated that the potential benefits of having bond and repo trades centrally cleared had increased since its previous consultation on the matter.

In 2015, the bank concluded that the case for introducing CCPs to the repo market on grounds of financial stability was not strong enough. The inter-dealer market at the time was small and a significant share of repo transactions involved the RBA.

Since then, the country’s bond and repo markets have become more international and private amid increased participation by non-Australian residents and commercial actors. The bond market has grown substantially owing to monetary expansion during the Covid-19 pandemic. These developments point to a stronger case for introducing CCPs, the RBA suggested.

“The increased appetite for a CCP reflects more interest in the potential benefits of central clearing as well as growth in the market and the complexity from the growing number of bilateral clearing agreements,” the bank said.

Renewed interest in CCPs

CCPs feature heavily in derivatives markets, as regulations introduced following the global financial crisis require many contracts to be centrally cleared. However, the RBA noted there had been renewed debate in recent years about the pros and cons of using central clearing in bond and repo markets.

In October 2022, the Financial Stability Board called for greater use of central clearing to enhance the resilience of liquidity supplies during periods of stress. It said central clearing was not widely used in most of the core bond markets, though it was more relevant in the repo markets.

The RBA pointed out that in recent years various central banks have published research demonstrating how central clearing has helped improve the functioning of market during stress events, such as the liquidity rush of March 2020.

On the other hand, a Bank of Italy paper published last week argued that the growth in CCPs over the last decade has given rise to concentration risk and a “too-big-to-fail” problem. The paper discussed the possibility of defaults by clearing members posing a danger to financial stability.

The RBA’s consultation paper is open to feedback until September 4.