On March 4, 2026, the Governor of the Bank of Canada gave a speech that most Canadians will never read. It was delivered to the Global Risk Institute in Toronto, titled “New players, old risks.” In it, he described a $16 trillion market that most people have never heard of, announced that the Bank of Canada would change how it operates in that market, and said the quiet part out loud about what keeps a central banker awake at night. This piece translates what he said.
What is a repo?
A repo in one sentence: A repurchase agreement is a short-term loan where one party sells government bonds to another party and agrees to buy them back — usually the next day — at a slightly higher price. The difference in price is effectively the interest.
Think of it as a pawnshop for government bonds. You hand over your bonds, you get cash, and you agree to come back tomorrow with the cash plus a small fee to get your bonds back. Except the amounts are in the billions, the “pawnshop” is another bank or hedge fund, and the “small fee” sets the short-term interest rate for the entire financial system.
Why repos exist. Banks need short-term cash. Pension funds need to park money safely overnight. Hedge funds need to borrow to take leveraged positions. Government bond dealers need to finance their inventories. The repo market connects all of them. It is, in the Financial Stability Board’s language, the plumbing that facilitates “the flow of cash and securities throughout the financial system.” [1]
Why repos matter to you. If you have a fixed-rate mortgage, a pension, or savings in a bond fund, you are connected to this market. Government of Canada bond yields set the benchmark for fixed mortgage rates. When something disrupts the repo market, bond yields can spike suddenly — not because the economy changed, but because the funding mechanism seized up. That is a plumbing problem, not an economic problem. But it hits the same way.
How big is this?
The Financial Stability Board published a report on February 4, 2026 that put hard numbers on the repo market for the first time at this level of detail. [1]
Approximately $16 trillion in government bond-backed repos were outstanding at the end of 2024 — up roughly 20% since 2022. Government bonds account for about 80% of all repo collateral. The United States accounts for nearly 60% of activity, followed by the United Kingdom, the euro zone, and Japan. About half of all outstanding repos have overnight maturity. Almost 40% of repos outstanding were between counterparties in different jurisdictions.
1. The global repo market. The FSB estimates approximately $16 trillion in government bond-backed repos were outstanding at end-2024, representing roughly 80% of total repo collateral. The market grew approximately 20% since 2022. The U.S. accounts for nearly 60% of activity. [1]
2. Funding structure. Approximately half of the global repo stock has overnight maturity. In the non-centrally cleared segment, approximately 70% of activity operates with zero haircuts — meaning lenders take no collateral cushion above the loan value. Haircuts are zero or negative more than 80% of the time, per the FSB. [1]
3. Hedge funds in Canadian government bonds. Hedge funds purchase up to 50% of Government of Canada bonds sold at auction and account for a significant share of secondary market trading, per Macklem’s March 4, 2026 speech citing BoC Financial Stability Report 2025 data. A separate October 2025 BoC staff note found GoC nominal bond issuance nearly doubled over five years, from $122 billion in 2019–20 to $237 billion in 2024–25, with hedge fund participation rising in tandem. [2] [4]
4. Basis trading growth in Canada. Cash-futures basis trades — where hedge funds buy a government bond and simultaneously sell a futures contract to profit from small pricing gaps — grew from 1% to 8% of GoC bond market trading volume between 2016 and 2024. The trade grew from 1% to 2% of repo market trading volume over the same period. [3]
5. Concentration risk. The top five hedge fund firms account for almost 70% of trading activity in macro and curve trade strategies in Government of Canada bonds. Even in other strategies, the top five firms account for over 50%. The Bank of Canada warned that a rapid unwind by one or two firms could cause a “substantial and sudden spike in bond sales.” [5]
6. Bank of Canada infrastructure change. On March 4, 2026, Macklem announced the Bank will join the Canadian Collateral Management Service (CCMS) for its repo operations by early 2027 and intends to use the Canadian Derivatives Clearing Corporation (CDCC) for central clearing once TMX Group completes system upgrades. The accompanying market notice stated the changes will help develop the term repo market and “reduce frictions” in monetary policy transmission. [2] [6]
7. International context. The U.S. SEC has mandated central clearing for most U.S. Treasury-collateralized repo transactions by June 2027. The European Central Bank will centrally clear some operations in 2026. The European Union and United Kingdom are also increasing centrally cleared repo activity. [2]
Why overnight funding plus leverage equals fragility
Here is the core mechanism. A hedge fund buys $1 billion in Government of Canada bonds at auction. It does not have $1 billion in cash. It has perhaps $10–50 million. To finance the rest, it enters a repo: it hands the bonds to a lender (typically a bank or dealer) and receives cash overnight. Tomorrow, it buys the bonds back at a slightly higher price. Then it does the same thing again. And again. Every day.
This is leverage. A small amount of capital controls a very large position, rolled over nightly. In normal times, this works seamlessly. The lender knows the borrower, the collateral is government bonds (the safest asset class), and the interest rate is tiny. Everyone profits from small pricing inefficiencies.
The problem arrives when conditions change suddenly. If interest rate volatility spikes, lenders may demand higher haircuts — meaning more collateral for the same loan. If lenders pull back entirely, the hedge fund cannot roll over its position. It must sell bonds into a market that is already under stress. Because repo funding is overnight, this adjustment can happen in a single day. Leverage that took months to build can unwind in hours.
When multiple leveraged funds sell simultaneously, bond prices drop, which reduces the value of the collateral backing other repos, which triggers more margin calls, which forces more selling. This is the feedback loop that central bankers describe in careful language. What it means in plain terms: a plumbing failure in the repo market can crash government bond prices even when nothing has changed about the government’s ability to pay its debts.
This has happened before
Macklem cited three episodes in his speech. In March 2020, the “dash for cash” at the onset of the pandemic caused repo markets to seize across major jurisdictions as leveraged investors rushed to sell bonds for cash. Central banks, including the Bank of Canada, intervened with emergency liquidity. In September 2022, leveraged liability-driven investment funds in the UK were forced to sell gilts (UK government bonds) into a spiralling market, nearly triggering a pension fund collapse before the Bank of England intervened. And in spring 2025, stress in the U.S. Treasury market showed similar dynamics with leveraged hedge fund positions. [2]
The pattern is the same in each case: leveraged positions funded by short-term repos, a sudden change in conditions, forced selling, and central bank intervention to prevent the plumbing failure from becoming a financial crisis.
What is a basis trade?
A basis trade is one of the main ways hedge funds use the repo market to make money from government bonds. Here is how it works.
A government bond and a futures contract on that bond should, in theory, trade at the same price. In practice, they often differ slightly. A hedge fund buys the actual bond and simultaneously sells the futures contract, locking in the small price gap as profit. Because the gap is tiny — often a few basis points — the fund uses massive leverage through the repo market to make the trade worthwhile. Buy $1 billion in bonds with $20 million in capital, earn the spread on the full $1 billion.
In Canada, the Bank of Canada’s own research shows this trade grew from 1% of GoC bond trading volume in 2016 to 8% by 2024. [3] It is concentrated: a small number of firms account for the majority of activity. [5]
The trade itself is low-risk for the individual fund — the two positions largely offset each other. But the scale and the funding structure create systemic risk. If repo funding is disrupted, the fund must unwind both legs of the trade at once, selling bonds and buying back futures in a compressed timeframe. When multiple funds do this simultaneously, the market impact is severe.
What Macklem announced — and why
Macklem’s speech covered two categories: the diagnosis and the response.
The diagnosis. Risks have migrated from banks to non-bank financial intermediaries. Post-2008 regulations made banks safer, but the riskier activities moved to hedge funds and private credit. These entities generally face lower reporting requirements and less monitoring. The FSB’s surveillance framework was built for banking; it has not kept pace with the growth of non-bank finance. [2]
The response. Central clearing. Instead of two parties doing a repo bilaterally — where each bears the risk of the other defaulting — a central counterparty sits in the middle, guaranteeing both sides. This reduces the risk that one firm’s failure cascades through the system. It also creates opportunities for “netting” — offsetting positions so less collateral is needed overall — and imposes standardised margin requirements that remain stable through market cycles rather than spiking during stress. [2] [6]
Concretely, the Bank of Canada will join the Canadian Collateral Management Service by early 2027 and will use the Canadian Derivatives Clearing Corporation for central clearing once TMX Group completes its upgrades. The Bank explicitly framed this as making central clearing “more attractive for market participants” — leading by example to shift the market toward more resilient infrastructure. [2] [6]
This piece focuses on repo market structure and the Bank of Canada’s infrastructure response. It does not attempt to quantify Canadian pension fund or insurer exposures to private credit — the second major risk Macklem addressed in the same speech, and one where data gaps are even wider. The private credit dimension is covered separately in The $82 Billion Stress Test.
Macklem also referenced the conflict in Iran and its effects on energy and financial market volatility. This piece does not cover the geopolitical dimension, which may be a more immediate trigger for repo market stress than the structural vulnerabilities described here.
The speech was delivered in Macklem’s dual capacity as Bank of Canada Governor and Chair of the FSB’s Standing Committee on Assessment of Vulnerabilities. Some of the statistics cited are global rather than Canada-specific. Where Canadian data is available, it is specified.
Connection to previous coverage
This speech extends two threads documented in earlier Markets coverage on this site.
The Warning documented that global credit spreads were at their tightest since 2007 and presented two sourced arguments on whether Canada should be building a buffer or spending into the cycle. Macklem’s speech provides the institutional confirmation: the Bank of Canada sees the same risk landscape and is taking structural action in response.
The $82 Billion Stress Test documented how private credit stress shows up as liquidity management events before defaults. Macklem’s speech identifies private credit as the second major area of concern alongside repo market leverage — and explicitly notes that private credit has never been tested through a full economic downturn.
The connecting thread: risks that used to sit inside regulated banks have migrated to hedge funds and private credit funds. The regulatory framework has not kept pace. The Bank of Canada is now reinforcing the infrastructure underneath these markets. Whether it is reinforcing fast enough is an open question.
The objective reading. Macklem’s speech is a central banker doing two things simultaneously: acknowledging that the financial system has structural vulnerabilities that regulators have not fully addressed, and announcing concrete infrastructure changes to reduce the risk of a plumbing failure in Canada’s sovereign debt market. The $16 trillion in global government bond-backed repos, funded substantially overnight with zero haircuts, represents a structural fragility that has already produced crises in multiple jurisdictions. Canada’s specific exposure is elevated because hedge funds now purchase up to half of GoC bonds at auction and the activity is concentrated among a small number of firms. The central clearing announcement is preventive — strengthening the infrastructure before stress arrives rather than during it.
Counter-interpretation (also reasonable). Hedge funds bring genuine benefits to government bond markets: they absorb large issuance volumes, improve price discovery, and add liquidity. The Bank of Canada’s own research notes that hedge fund participation has helped Canada distribute nearly doubled bond issuance without persistent upward pressure on yields. The basis trade is individually low-risk; the systemic concern requires multiple simultaneous failures to materialise. Central clearing is a sensible infrastructure upgrade, but framing it as a response to imminent danger overstates the urgency. Macklem himself said his goal was “not to alarm, but to shed light.” The system may be more resilient than the vulnerability framing implies, particularly given that post-2020 and post-2022 lessons have already improved risk management practices.
This analysis would need revision if repo funding maturity lengthens materially — a shift from predominantly overnight to term repos would reduce the speed at which leverage can unwind and weaken the core fragility mechanism described here.
It would also need revision if haircut practices in the non-centrally cleared segment normalise above zero across a broad share of the market, indicating that lenders are independently pricing risk rather than relying on zero-cushion norms.
The concentration concern weakens if hedge fund participation in GoC bond auctions diversifies — that is, if the share held by the top five firms declines while overall participation remains stable, reducing the single-firm unwind risk the Bank of Canada has flagged.
The urgency of the infrastructure response weakens if the next significant market stress event shows Canadian repo markets functioning smoothly without central bank intervention — suggesting that existing bilateral arrangements are more resilient than the FSB framework implies.
Primary Sources
- Financial Stability Board, “Vulnerabilities in Government Bond-backed Repo Markets,” February 4, 2026. $16 trillion outstanding, 80% government bond collateral, ~50% overnight maturity, 70% zero haircuts in non-centrally cleared segment, ~20% growth since 2022. fsb.org
- Bank of Canada, “New players, old risks: Financial stability in a changing landscape,” Remarks by Governor Tiff Macklem, Global Risk Institute, Toronto, March 4, 2026. Hedge funds purchase up to 50% of GoC bonds at auction; central clearing announcement; private credit risk assessment. bankofcanada.ca
- Bank of Canada Staff Analytical Note 2024-16, A. Uthemann and R. Vala, “How big is cash-futures basis trading in Canada’s government bond market?” June 2024. Basis trades grew from 1% to 8% of GoC bond trading volume and 1% to 2% of repo trading volume, 2016–2024. bankofcanada.ca
- Bank of Canada Staff Analytical Note 2025-22, “The increasing role of hedge funds in Government of Canada bond auctions,” October 2025. GoC nominal bond issuance nearly doubled from $122B to $237B over five years; hedge fund participation rose in tandem. bankofcanada.ca
- Bank of Canada, “Hedge funds and their trading strategies in the Government of Canada bond market,” Sparks at Bank, February 2026. Top 5 firms account for ~70% of macro/curve trading activity; rapid unwind could cause “substantial and sudden spike in bond sales.” bankofcanada.ca
- Bank of Canada Market Notice, “Bank of Canada to join the Canadian Collateral Management Service for its repo operations,” March 4, 2026. bankofcanada.ca