Global Financial Watchdog Warns Of Escalating Risks In The $16 Trillion Government-Backed Repo Market

Introduction

In early February 2026 global financial policymakers were sent a stark reminder of the structural vulnerabilities that can quietly build beneath the surface of what financial markets consider core plumbing. The Financial Stability Board (FSB)—the international regulatory coordination body for G20 authorities—issued a comprehensive report drawing attention to rising systemic risks within the $16 trillion market for government bond-backed repurchase agreements (repos), a central tier of financial system liquidity and funding. According to the report, the scale of outstanding repo transactions had climbed roughly 20 percent in just a couple of years, and key vulnerabilities such as increased leverage, concentrated counterparty activity, and intense reliance on very short-term funding could make this market a transmitter of shock rather than a buffer against it. 

Understanding The Government-Backed Repo Market

At its core the repurchase agreement (repo) market functions as a mechanism for institutions to borrow cash in the short term against high-quality collateral—typically sovereign debt. A repo transaction involves one party selling a security to another with an agreement to repurchase that same security at a later date generally at a slightly higher price, the difference effectively representing the interest on the loan. Government bond-backed repo markets are therefore the fundamental infrastructure through which banks, broker-dealers, hedge funds, pension funds, money market funds, and other financial actors manage liquidity daily, engaging in trillions of dollars of transactions that help underpin bond market functioning and price discovery.

The FSB’s findings show that about $16 trillion of these transactions were outstanding at the end of 2024, with the United States accounting for nearly 60 percent of market activity, followed by the United Kingdom, the euro zone, and Japan. The sheer size and global interconnectedness of this market make it crucial to financial stability—yet also mark it as a potential amplifier of stress if conditions deteriorate.

Key Vulnerabilities Highlighted By The FSB

The FSB’s report identifies several structural weaknesses in government bond-backed repo markets that could pose risks to the financial system if left unaddressed. A recurring core theme is the build-up of leverage, particularly among non-bank financial firms such as hedge funds. Leverage involves borrowing to amplify financial positions: when this is paired with short maturities and high reliance on refinance markets, any tightening of funding conditions can compel rapid de-leveraging, magnifying price volatility and liquidity stress.

Another concern is the high concentration of borrowers and intermediaries in particular market segments. While the market overall is broad, certain segments—especially in the gilt repo market in the UK—are heavily influenced by a small number of large players. In the UK’s market for government bonds backed by repurchase agreements, some estimates show a few hedge funds dominating leveraged borrowing, which raises the specter of concentrated fire sales should these entities face sudden funding squeezes.

The FSB also noted demand-supply imbalances in collateral and funding flows. Collateral supply dynamics—when combined with short funding tenors—can create mismatches that intensify price pressures if any counterparty pulls back. Because repo transactions hinge on both the availability of high-quality collateral and the willingness of lenders to extend short-term cash, any perceptual shift toward increased risk can reduce liquidity just when it is most needed.

Historical Stress Episodes And Lessons

The repo market has been identified repeatedly as a source of fragility during moments of financial stress. In September 2019 the U.S. overnight repo rate unexpectedly surged, leading to emergency liquidity injections by the Federal Reserve. Normally a stable, low-risk segment of the funding landscape, the sudden spike signaled that even large, sophisticated markets could seize up without warning when cash demand exceeded supply.

Similar dynamics surfaced in 2022 when liability-driven investment (LDI) funds in the UK, which used significant leverage to purchase long-term government bonds, encountered margin calls and forced selling that reverberated through gilt markets and impacted repo operations. While these incidents were contained and broader systemic collapse was avoided, they underscored that repo markets can be a nexus point for contagion when demand for liquidity outstrips supply and when leveraged positions must be unwound under stress.

These stress episodes have convinced regulators that repo markets are not immune from the kinds of spirals that afflicted more traditional banks during past financial crises. The FSB’s report frames such occurrences as cautionary, urging policymakers to treat the repo segment with the same gravity as other systemic sectors.

The Role Of Non-Bank Financial Institutions

Non-bank financial institutions—including hedge funds, asset managers, and money market funds—have expanded their footprint in repo markets over recent years. While banks were historically the primary intermediaries in these markets, regulatory reforms following the global financial crisis led many banks to scale back certain activities, creating space for non-bank entities to step in. These entities often operate with lighter leverage constraints than banks and may borrow extensively from short-term funding sources.

The FSB’s concern is that this shift, while beneficial for market depth under normal conditions, also transfers risk to parts of the financial sector that may not be subject to the same level of oversight or capital cushions. Hedge funds, for instance, may engage in repo borrowing at high leverage and roll funding on a daily basis. Should these funding sources suddenly tighten, such entities can face rapid losses that force them to sell collateral—pushing down prices and exacerbating market stress.

The interconnectedness between non-bank actors and the broader financial system means that distress in repo markets can transmit beyond just the entities directly involved in transactions. This amplifies the risk that a stress event could cascade into other areas of banking and credit markets, affecting borrowing costs more broadly, investment flows, and economic activity.

Regulatory Gaps And Surveillance Shortfalls

One of the central messages of the FSB’s report is that data gaps and inadequate surveillance capabilities hinder regulators’ ability to see where risks are accumulating in repo markets. Unlike centralized clearing houses where transactions are recorded and transparent, much of repo activity—especially in bilateral or over-the-counter segments—can occur in private arrangements with limited reporting.

To address this, the FSB recommends enhanced data collection and real-time monitoring that would give authorities a clearer picture of leverage levels, counterparty exposures, and maturity mismatches. Improved surveillance technologies could alert regulators to emerging vulnerabilities long before they escalate into full-blown crises.

Policymakers are encouraged to work toward closing these gaps, potentially through standardized reporting requirements or encouraging market infrastructure reforms that consolidate transaction visibility. The goal is to reduce blind spots that make it difficult to assess aggregate risk positions and to spot stress signals early.

Proposals Under Consideration

The report’s release has catalyzed discussion among regulators and markets about potential policy interventions. One such proposal gaining traction is the expansion of central clearing for repo and securities financing transactions. Central clearinghouses act as intermediaries between buyers and sellers, netting transactions and reducing bilateral counterparty risk. The U.S. Securities and Exchange Commission (SEC) has already signaled a mandate to require central clearing of most repo and cash transactions in U.S. Treasury markets by mid-2027—a move designed to enhance transparency and reduce systemic risk.

In the UK, the Bank of England has explored tightening regulation for government bond-backed repo markets, including measures to address leverage and collateral risk concentrations. Given that portions of the market are dominated by a few large hedge funds, regulators are weighing options that could include higher margin requirements, restrictions on certain funding practices, or incentives for more durable funding structures.

While central clearing and enhanced oversight are not without costs or implementation challenges, proponents argue that such reforms are necessary to bolster confidence in the resilience of short-term funding infrastructures. They contend that proactive measures today could avert the kind of liquidity crunches that have caused abrupt stress in the past.

The Global Dimension And Systemic Implications

Because the repo market is global in scope and integrates activity across multiple jurisdictions, vulnerabilities in one region can spill over into others. For example turmoil in U.S. Treasury repo markets can influence eurozone bond funding dynamics or pressure liquidity flows in Asia. This cross-border interdependence underscores why the FSB—an international coordination body—chose to spotlight these risks. It also means that solutions must be similarly international in nature, with regulatory cooperation and shared standards to ensure consistency in monitoring and oversight.

The report’s timing also intersects with broader debates about financial regulation in an era of rapid technological change, evolving investor behavior, and heightened macroeconomic uncertainty due to shifting monetary conditions. Central banks continue to balance inflation targets with growth concerns, and policy shifts in major economies can alter funding costs and risk appetites, feeding back into repo markets with minimal lag.

Looking Forward

The Financial Stability Board’s warning serves as both a diagnosis of current structural weaknesses and a call to action for regulators, market participants, and policymakers. While the repo market has proven remarkably resilient over decades of operation, recent stress events and the rapid scaling of leveraged trades highlight that complacency could be costly. Strengthening data infrastructure, encouraging broader access to central clearing, and rethinking how non-bank participants are supervised may help ensure that this vital component of global finance remains a source of resilience rather than fragility.

Financial markets hinge on confidence and predictability. If actors large and small can trust that core plumbing like the repo market will function smoothly even under stress, credit flows remain uninterrupted, price discovery stays robust, and the broader economic system benefits. Conversely, if hidden vulnerabilities go unchecked, the cost of sudden corrections can be steep.

Conclusion

The Financial Stability Board’s warning about the $16 trillion government-backed repo market is a timely reminder that even the most essential and long-trusted parts of the financial system can become sources of risk when leverage, opacity, and short-term funding dependence grow unchecked. While the repo market plays a critical role in keeping global finance liquid and efficient, its increasing size, concentration, and reliance on non-bank institutions mean that shocks can spread faster and more widely than in the past. History has already shown that stress in this market can ripple into bond markets, banking systems, and the real economy. Moving forward, stronger transparency, better data, wider central clearing, and closer supervision of highly leveraged players will be crucial.