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Magnifying the Risk of Fire Sales in the Tri-Party Repo Market

Author

Listed:
  • Leyla Alkan
  • Vic Chakrian
  • Adam Copeland
  • Isaac Davis
  • Antoine Martin

Abstract

The fragility inherent in the tri-party repo market came to light during the 2008-09 financial crisis. One of the main vulnerabilities is the risk of fire sales, which can be enhanced by the response of some investors to stress events. Money market mutual funds (MMFs) and the agents investing cash collateral obtained from securities lending (SLs) are thought to behave, in times of stress, in ways that exacerbate fire-sale risks in the tri-party repo market. Based on detailed investor data, we find that MMFs and SLs constitute almost half of the investor market, making it crucial for tri-party repo participants and regulators to account for MMF and SL investment behavior when considering how to mitigate the risk of fire sales.

Suggested Citation

  • Leyla Alkan & Vic Chakrian & Adam Copeland & Isaac Davis & Antoine Martin, 2013. "Magnifying the Risk of Fire Sales in the Tri-Party Repo Market," Liberty Street Economics 20130717, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:86879
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    More about this item

    Keywords

    systemic risk; tri-party repos; fire sales;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G1 - Financial Economics - - General Financial Markets

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