SPECIAL REPO RATES

This article provides the causes and symptoms of special repo rates in a competitive market for repurchase agreements. A repo rate is, in ef fect, an interest rate on loans collateralized by a specific instrumen t. A ''special'' is a repo rate significantly below prevailing market riskless interest rates. This article shows that specials can occur wh en those owning the collateral are inhibited, whether from legal or in stitutional requirements or from frictional costs, from supplying coll ateral into repurchase agreements. Specialness increases the equilibri um price for the underlying instrument by the present value of savings in borrowing costs associated with the repo specials.