FSB warns of financial stability challenges in repo markets
05 February 2026 Global
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A recent report by the Financial Stability Board (FSB) entitled 鈥榁ulnerabilities in Government Bond-backed Repo Markets鈥�, the report focuses on the repo markets backed by government bond collateral 鈥� as this makes up the vast majority of collateral used by market participants.
The report estimates that approximately US$16 trillion in repo trades backed by government bonds were outstanding, representing around 80 per cent of the total stock of all repo trades, at the end of 2024.
It highlights how quickly repo markets were impacted in several recent episodes of market stress and warns that, given the importance of repo markets within the global financial system, it is critical to preserve their functionality, particularly during periods of stress.
The FSB identified several vulnerabilities within repo markets that could pose risks to the broader financial system.
First, repo markets can facilitate the build-up of leverage in the financial system.
Approximately 70 per cent of activity in the non-centrally cleared segment operates with zero haircuts and there are high levels of collateral rehypothecation.
Second, demand and supply imbalances can arise quickly in periods of stress if repo lenders are unwilling or unable to provide funds to meet spikes in the demand for liquidity.
Third, repo markets are highly concentrated along various dimensions, which could lead to disruptions in the event of failures.
According to the report, the core nature of repo markets may act as a conduit through several channels in spreading shocks across the financial system.
Strains in repo and government bond markets may spill over into each other or across multiple jurisdictions, given the international nature of repo markets.
If haircuts are insufficient, they further expose lenders to leveraged counterparties, amplifying risks across the financial system.
The report outlines several measures for authorities to consider in response to these vulnerabilities, including closing data gaps and strengthening surveillance capabilities.
Further, the report suggests addressing vulnerabilities related to liquidity imbalances and leverage by taking into account the FSB鈥檚 recommendations on leverage in nonbank financial intermediation (NBFI), global securities financing transactions exercise, as well as other relevant international standards.
The report estimates that approximately US$16 trillion in repo trades backed by government bonds were outstanding, representing around 80 per cent of the total stock of all repo trades, at the end of 2024.
It highlights how quickly repo markets were impacted in several recent episodes of market stress and warns that, given the importance of repo markets within the global financial system, it is critical to preserve their functionality, particularly during periods of stress.
The FSB identified several vulnerabilities within repo markets that could pose risks to the broader financial system.
First, repo markets can facilitate the build-up of leverage in the financial system.
Approximately 70 per cent of activity in the non-centrally cleared segment operates with zero haircuts and there are high levels of collateral rehypothecation.
Second, demand and supply imbalances can arise quickly in periods of stress if repo lenders are unwilling or unable to provide funds to meet spikes in the demand for liquidity.
Third, repo markets are highly concentrated along various dimensions, which could lead to disruptions in the event of failures.
According to the report, the core nature of repo markets may act as a conduit through several channels in spreading shocks across the financial system.
Strains in repo and government bond markets may spill over into each other or across multiple jurisdictions, given the international nature of repo markets.
If haircuts are insufficient, they further expose lenders to leveraged counterparties, amplifying risks across the financial system.
The report outlines several measures for authorities to consider in response to these vulnerabilities, including closing data gaps and strengthening surveillance capabilities.
Further, the report suggests addressing vulnerabilities related to liquidity imbalances and leverage by taking into account the FSB鈥檚 recommendations on leverage in nonbank financial intermediation (NBFI), global securities financing transactions exercise, as well as other relevant international standards.
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