The Role of Margin and Spread in Secured Lending: Evidence from the Bilateral Repo Market

Auh, Jun Kyung; Landoni, Mattia

doi:10.2139/ssrn.2648611

Cited by 3 publications

(3 citation statements)

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“…The haircut should therefore reflect borrower risk and asset re-deployability along the same lines as in the case when non-financial assets serve outlined in the previous section. Evidence confirms that haircuts are larger when lenders are exposed to more counterparty risk or when the collateral asset is less liquid (Auh and Landoni, 2015).…”

Section: Some Terminology: Haircuts and Marginsmentioning

confidence: 82%

“…In that case the cash borrower loses the haircut, i.e., he loses the difference between the cash he received and the value of the collateral asset. Consequently, the pricing of repo contracts (rates and haircuts) not only reflects the characteristics of cash borrowers and of the underlying collateral, but also that of cash lenders (Auh and Landoni, 2015).…”

Section: Repos Vs Secured Lendingmentioning

confidence: 99%

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On Collateral: Implications for Financial Stability and Monetary Policy

2017

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Section: Some Terminology: Haircuts and Marginsmentioning

confidence: 82%

Section: Repos Vs Secured Lendingmentioning

confidence: 99%

On Collateral: Implications for Financial Stability and Monetary Policy

2017

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“…Fecht, Nyborg, Rocholl, and Woschitz (2016) study repos between German banks and the central bank. Kyung Auh and Landoni (2016) use proprietary bilateral repo data provided by a hedge fund. These data sets are different from the tri-party repos that we discuss in this article.…”

Section: Introductionmentioning

confidence: 99%

Tri-Party Repo Pricing

Hu¹,

Pan²,

Wang³

2020

J. Financ. Quant. Anal.

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We document the central role of collateral in the pricing of tri-party repos. Markets are competitive for repos with safe collateral but are severely segmented for repos with risky collateral, such as equities and low-grade corporate bonds. Fund families are the sole contributors to the segmentation, and collateral concentration is the main determinant in the substantial variation in repo pricing, both across and within segments. The segmented structure points to Fidelity as a systemically important player and the markets potential fragility. Facing market segmentation, dealers optimize financing costs by allocating their collateral across fund families.

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Liquidity windfalls: The consequences of repo rehypothecation

Infante

2019

Journal of Financial Economics

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This paper presents a model of repo rehypothecation in which dealers intermediate funds and collateral between cash lenders (e.g., money market funds) and prime brokerage clients (e.g., hedge funds). Dealers take advantage of their position as intermediaries, setting different repo terms with each counterparty. In particular, the difference in haircuts represents a positive cash balance for the dealer that can be an important source of liquidity. The model shows that dealers with higher default risk are more exposed to runs by collateral providers than to runs by cash lenders, who are completely insulated from a dealer's default. In addition, collateral providers' repo terms are sensitive to changes in a dealer's default probability and its correlation with the collateral's outcome, whereas cash lenders' repo terms are unaffected by these changes. This paper rationalizes the difference in haircuts observed in bilateral and tri-party repo markets, reconciles the partial evidence of the run on repo during the recent financial crisis, and presents new empirical evidence to support the model's main prediction on haircut sensitivities.

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The Role of Margin and Spread in Secured Lending: Evidence from the Bilateral Repo Market

Cited by 3 publications

References 0 publications

On Collateral: Implications for Financial Stability and Monetary Policy

On Collateral: Implications for Financial Stability and Monetary Policy

Tri-Party Repo Pricing

Liquidity windfalls: The consequences of repo rehypothecation

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