Balancing the Canadian Repo Market through QT: The Diminishing Role of Settlement Balances

Banks and their dealers’ arms play a key role in balancing clients’ demand in the Canadian repo market. Repo market imbalances can be large and persistent, at times putting upward pressure on the cost of short-term funding in Canada, including the CORRA benchmark. This note examines the main funding sources that banks use to absorb these imbalances. We show that during QE and early during quantitative tightening, banks’ holdings of settlement balances were the main buffer to absorb clients’ net repo demand, but by the end of QT they had become far less central to balancing the repo market. Despite this, we find that throughout QT, banks and dealers accommodate increasingly volatile shifts in their clients’ repo demand through a more active redistribution among them, a somewhat more active use of foreign currency markets and a more active use of the Receiver General (RG) and Bank of Canada (BoC) facilities.