In the Market: The mysterious one-day drop in a repo rate

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In the Market: The mysterious one-day drop in a repo rate

- Something odd just happened in U.S. short-term funding markets: a benchmark interest rate suddenly fell precipitously on March 19 before bouncing back up the next day.

Behind the drop was a large, single trade late in the day involving a big player, according to three market sources and a review of publicly available transaction data. The trade was in the mid-$20 billion range at a 5% rate and happened sometime after 1 pm, according to two of the sources. The aberrant trade poses a mystery that's worth solving for the sake of transparency in one of the world's most important markets. While the incident may be contained, with the market working as intended, information about what went on could provide important insights into market function.

Duffie, however, noted that there was no obvious sign that it represented"an undue risk to the financial system or bad behavior." If the trade involved a government sponsored enterprise or money market fund, it could provide information about the institution's risk controls. The impact of the March 19 trade on the overall market was limited. Other benchmark rates based off transactions in the market, such as the Secured Overnight Financing Rate and the Broad General Collateral Rate, were not affected by the trade.

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