OFR Researchers Warn of Potential Financial Contagion from the Repo Markets

Researchers from the Office of Financial Research ("OFR") provided a "complete" review of the U.S. repo market and warned that the "interwoven" nature of banks and nonbank financial institutions creates potential channels for contagion during periods of market stress.

In an OFR brief, researchers analyzed recently expanded, non-centrally cleared bilateral repo ("NCCBR") data to quantify the market’s scale and structure. They found that total daily outstanding positions across all segments averaged $12.5 trillion in the second half of 2025. The researchers noted that while the repo market is a primary source of short-term funding and a "basis for financial market reference rates," limited visibility into its flows has historically impeded the ability of regulators to measure and manage systemic risk.

The analysts identified distinct roles for various financial entity types based on their net lending and borrowing positions. Money market funds and government-sponsored enterprises were found to be the primary suppliers of liquidity, lending nearly $3.5 trillion on net. On the opposite side, hedge funds emerged as the largest net borrowers, with outstanding positions exceeding $1.8 trillion. The researchers observed that hedge funds heavily utilize the NCCBR segment to fund leveraged strategies, often taking advantage of "zero haircuts" on collateral to maximize their borrowing capacity.

The OFR highlighted a significant evolution in the role of large financial institutions, particularly global systemically important banks and primary dealers. The researchers concluded that these entities "account for the majority of gross activity," though they typically maintain small net positions, acting as intermediaries between cash lenders and borrowers. The researchers found that banks are increasingly performing dealer-like functions by "intermediat[ing] between nonbank financial institutions." This is particularly evident, they said, in sponsored cleared segments, where banks borrow from money funds and lend to hedge funds, a trend that has grown substantially over the last five years.

The researchers said that the "interconnectedness" revealed by the data has profound implications for financial stability. They warned that the repo market remains a primary "channel for contagion," as seen in previous crises. They asserted that continued monitoring of these flows is essential as the market prepares for the implementation of mandatory central clearing in 2027.