At face value, these regulations could be expected to have contributed to bumping up demand for government bonds, thereby reinforcing the effects of the ECB’s APP. But because, as a result of our asset purchases, banks hold a large amount of central bank reserves, which count as highquality liquid assets, such regulations are unlikely to have been a key driver of increasing collateral scarcity. These reforms, however, are likely to have affected the repo market in different ways. One of them you can see on my next slide. Here I show the distribution of repo market activity for oneday tenor contracts exchanged bilaterally or via central clearing counterparties (CCPs) for German collateral. The chart shows an interesting feature, namely that the market attaches a premium to centrally cleared transactions. The reasons for this are unlikely to surprise you: the leverage ratio allows for offsetting cash proceeds to be netted off when the transactions are with the same counterparty, have the same end date, and are conducted in the same settlement system. This means that although repo transaction are not part of the 2009 Pittsburgh central clearing mandate, which covers OTC derivatives, centrally cleared transactions have a premium because they make those trades less capital intensive compared with non-nettable ones. According to MMSR data, around two-thirds of repo transactions are already cleared centrally.
Second, as can be seen on the next slide, increasing excess liquidity has led to a notable decline in the share of trades backed by general collateral (GC), which is traditionally used to obtain funding for cash management purposes. This may suggest that proceeds from the sales of securities, together with the ECB conducting its main refinancing operations at fixed rate full allotment, have increasingly acted as a substitute for funding in the interbank market. At the same time, we have observed an appreciable increase in collateral-driven or specific repos. You can see this on the right-hand side. In other words, repos are increasingly conducted as a means to move securities among market participants, not primarily to raise cash.6 There might be several reasons for this. Smaller inventories held by market-makers after the crisis, for example, may cause them to source bonds in the repo market more often. Alternatively, short-selling activity may have increased, a phenomenon often observed at, or close to, monetary policy turning points when investors expect yields to rise. One factor that is likely to have contributed to the rise in special repos is policy-induced scarcity, however. This can best be seen when considering the German Bund market. Here, our purchases have absorbed a multiple of net issuance in recent years, meaning that we have actively reduced the stock of outstanding bonds held by private market participants.