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Unpacking repo haircuts and their implications for leverage

Author

Listed:
  • Felix Hermes
  • Maik Schmeling
  • Andreas Schrimpf

Abstract

Haircuts vary with repo trading motives, notably whether market participants primarily seek to raise cash or gain access to a specific security. Haircuts tend to increase with repo maturity and are lower for less volatile collateral assets. Benchmark sovereign bonds are often associated with subdued haircuts. Zero-haircut borrowing is common in hedge fund repo activity, with the largest hedge funds benefiting from the lowest haircuts, enabling very high levels of leverage.

Suggested Citation

  • Felix Hermes & Maik Schmeling & Andreas Schrimpf, 2025. "Unpacking repo haircuts and their implications for leverage," BIS Bulletins 117, Bank for International Settlements.
    • Handle: RePEc:bis:bisblt:117
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    References listed on IDEAS

    as
    1. Andreas Schrimpf & Hyun Song Shin & Vladyslav Sushko, 2020. "Leverage and margin spirals in fixed income markets during the Covid-19 crisis," BIS Bulletins 2, Bank for International Settlements.
    2. Christian Julliard & Gabor Pinter & Karamfil Todorov & Jean-Charles Wijnandts & Kathy Yuan, 2022. "What drives repo haircuts? Evidence from the UK market," BIS Working Papers 1027, Bank for International Settlements.
    3. Barth, Daniel & Kahn, R. Jay, 2025. "Hedge funds and the Treasury cash-futures basis trade," Journal of Monetary Economics, Elsevier, vol. 155(C).
    4. Aramonte, Sirio & Schrimpf, Andreas & Shin, Hyun Song, 2023. "Margins, debt capacity, and systemic risk," CEPR Discussion Papers 18570, C.E.P.R. Discussion Papers.
    5. Samuel J. Hempel & R. Jay Kahn & Robert Mann & Mark Paddrik, 2023. "Why Is So Much Repo Not Centrally Cleared?," Briefs 23-01, Office of Financial Research, US Department of the Treasury.
    Full references (including those not matched with items on IDEAS)

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