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Tri-Party Repo Pricing

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  • Hu, Grace Xing
  • Pan, Jun
  • Wang, Jiang

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.

Suggested Citation

  • Hu, Grace Xing & Pan, Jun & Wang, Jiang, 2021. "Tri-Party Repo Pricing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 56(1), pages 337-371, February.
    • Handle: RePEc:cup:jfinqa:v:56:y:2021:i:1:p:337-371_12
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    References listed on IDEAS

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    1. Arvind Krishnamurthy & Stefan Nagel & Dmitry Orlov, 2014. "Sizing Up Repo," Journal of Finance, American Finance Association, vol. 69(6), pages 2381-2417, December.
    2. Shengxing Zhang, 2014. "Collateral Risk, Repo Rollover and Shadow Banking," 2014 Meeting Papers 562, Society for Economic Dynamics.
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    6. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    7. Marcin Kacperczyk & Philipp Schnabl, 2013. "How Safe Are Money Market Funds?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(3), pages 1073-1122.
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    Cited by:

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    2. Viktoria Baklanova & Cecilia Caglio & Marco Cipriani & Adam Copeland, 2019. "The Use of Collateral in Bilateral Repurchase and Securities Lending Agreements," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 228-249, July.
    3. Huber, Amy Wang, 2023. "Market power in wholesale funding: A structural perspective from the triparty repo market," Journal of Financial Economics, Elsevier, vol. 149(2), pages 235-259.
    4. Li, Yi, 2021. "Reciprocal lending relationships in shadow banking," Journal of Financial Economics, Elsevier, vol. 141(2), pages 600-619.
    5. Marco Macchiavelli & Xing (Alex) Zhou, 2022. "Funding Liquidity and Market Liquidity: The Broker-Dealer Perspective," Management Science, INFORMS, vol. 68(5), pages 3379-3398, May.
    6. Kazuya Suzuki & Kana Sasamoto, 2022. "Quantitative Analysis of Haircuts: Evidence from the Japanese Repo and Securities Lending Markets," Bank of Japan Working Paper Series 22-E-13, Bank of Japan.
    7. Eisenschmidt, Jens & Ma, Yiming & Zhang, Anthony Lee, 2022. "Monetary policy transmission in segmented markets," Working Paper Series 2706, European Central Bank.
    8. Song Han & Kleopatra Nikolaou, 2016. "Trading Relationships in the OTC Market for Secured Claims : Evidence from Triparty Repos," Finance and Economics Discussion Series 2016-064, Board of Governors of the Federal Reserve System (U.S.).

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    More about this item

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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