Tri-Party Repo Pricing

Abstract

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.

Treasury inconvenience yields during the COVID-19 crisis

“…Our paper is also related to studies of the collateral market of safe assets, including Duffie (1996), Duffie, Garleanu, and Pedersen (2002), Gorton and Metrick (2012), Krishnamurthy, Nagel, and Orlov (2014), Bartolini, Hilton, Sundaresan, andTonetti (2011), Hu, Pan, andWang (2019), Song and Zhu (2019), and Lenel, Piazzesi, and Schneider (2019).…”

Treasury Inconvenience Yields During the Covid-19 Crisis

“…Our paper is also related to studies of the collateral market of safe assets, including Duffie (1996), Duffie, Garleanu, and Pedersen (2002), Gorton and Metrick (2012), Krishnamurthy, Nagel, and Orlov (2014), Bartolini, Hilton, Sundaresan, andTonetti (2011), Hu, Pan, andWang (2019), Song and Zhu (2019), and Lenel, Piazzesi, and Schneider (2019).…”

Quid Pro Quo: Liquidity Insurance in Dealer-Fund Network

“…[ Hu, et al (2019). They also find that Fidelity Fund Family is the "systematically important player" in the US Tri-party Repo market.…”

“…N-SAR filings, also from EDGAR database, that includes the rankings of trading counterparties based on the trading volume of all asset classes The Oct.2016 compliance date of the Money Market Reform provides us with a clean identification to study MMFs' interaction with dealers in the tri-party repo market. Repurchase agreements (repos) are considered to be the largest and the most important short-term financing channel for a variety of financial institutions (Hu, et al, 2019). I analyze how trading relationships in this market are formed and how they affect pricing and the provision of liquidity across MMFs.…”

“…I rule out the mutual insurance case by using the tri-party repo market data instead of the inter-bank offering data, because in tri-party repo market, borrowinglending relationship is unidirectional: MMFs are always providing liquidity, and dealers are always demanding liquidity. Therefore, by controlling for repo collateral details (as in Hu, Pan and Wang, 2019), repo transaction terms, dealer characteristics and fund characteristics, I purge out other confounding factors that might affect the repo rate and focus only on the effect of dealer-fund relationship strength on repo rates and repo haircuts.…”