At Realkreditdagen, Martin Wagner Toftdahl offered a central bank perspective on the Danish repo market. Within the Danish repo market, it is generally the Danish banks that lend liquidity to other market participants, whereas the amount of liquidity they receive is limited. Danish banks lend liquidity to a broad range of actors, with investment funds being the sector that receives the most liquidity; the five largest funds alone account for roughly half of the total repo market. A significant proportion of the repo loans taken by these five funds is used to leverage their investments in Danish mortgage bonds. The role of the repo market creates a need for a stable and predictable market, and Danish banks play a central role in supporting this.
A well-functioning repo market is absolutely crucial for well-functioning Danish financial markets as a whole. The repo market facilitates access to receive and place liquidity, is important for risk management, and supports the demand for bonds.
In his presentation, Martin Wagner Toftdahl also highlighted that the repo market is essential for monetary policy transmission - the pass-through from policy rates to money market rates. Monetary policy transmission is important, as it is through this channel that Danmarks Nationalbank structurally influences the krone exchange rate and supports the fixed exchange rate policy. Money market rates, including repo rates, should move closely in line with Danmarks Nationalbank’s monetary policy interest rates.
Danmarks Nationalbank’s interest rate corridor of fifteen basis points between deposit and lending rates provides monetary policy counterparties with an incentive to actively manage their liquidity using Danish kroner money markets. For example, if the interest rate on money market instruments is higher than what can be obtained by placing liquidity at Danmarks Nationalbank, monetary policy counterparties are incentivised to place their liquidity into the market. At the same time, there is an incentive to use Danmarks Nationalbank’s weekly lending facility and subsequently place the liquidity into the market if the money market rate is higher than Danmarks Nationalbank’s lending rate.
For money market rates to remain within Danmarks Nationalbank’s interest rate corridor, monetary policy counterparties must therefore be willing to efficiently distribute liquidity among each other and to utilise Danmarks Nationalbank’s lending facility. In spring 2025, there was increased volatility in krone money markets, with both repo and implicit forward rates occasionally significantly exceeding Danmarks Nationalbank’s lending rate. The volatility coincided with a decline in the net position, i.e. the net deposits of monetary policy counterparties after accounting for their drawings on the lending facility. Such elevated volatility signals that money markets are not functioning effectively.
The net position can be, and has previously been, at levels significantly below those seen last year. It is important for Danmarks Nationalbank to ensure that Danish kroner money markets, including the repo market, operates efficiently, stably and predictably irrespective of the size of the net position, and that monetary policy counterparties actively support this through liquidity redistribution and the use of Danmarks Nationalbank’s facilities. “Danmarks Nationalbanks weekly lending facility should be seen as an integral part of monetary policy counterparties’ liquidity management. This should support a stable and predictable Danish repo market in situations in which the net position is low. There should be no stigma attached to using our facilities,” said Martin Wagner Toftdahl.
Read more in the analysis: Effective liquidity distribution is key for well-functioning money markets
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