Repo tightness typically reflects an imbalance between the demand for, and availability of, certain securities in the repo market. Protracted repo tightness can affect the cash prices of these bonds and contribute to a reduction in market liquidity. It can also lead to an increase in settlement fails, where one party is unable to deliver the securities promised to its counterparty.
To help support market liquidity, the Bank is proposing changes to the intervention threshold for its securities lending. At the moment, it appears that the Bank’s existing threshold is setting a de facto floor for market repo rates. In some circumstances the rate does not seem to be low enough to induce sufficient lending from private sector bondholders to meet demand.