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The use of collateral in bilateral repurchase and securities lending agreements

Author

Listed:
  • Baklanova, Viktoria

    (Office of Financial Research)

  • Caglio, Cecilia

    (Federal Reserve Board of Governors)

  • Cipriani, Marco

    (Federal Reserve Bank of New York)

  • Copeland, Adam

    (Federal Reserve Bank of New York)

Abstract

We use unique data from U.S. bank holding company-affiliated securities dealers to study the use of collateral in bilateral repurchase and securities lending agreements. Market participants’ use of collateral differs substantially across asset classes: for U.S. Treasury securities transactions, we find that haircuts are large enough to provide full protection from default, whereas the same is not usually true for equities transactions. Further, although most of the equities in our sample are each associated with a unique haircut, most of the U.S. Treasury securities are each associated with more than one haircut. We relate these findings to implications of the zero value-at-risk feature that can be found in theories of collateral as an enforcement mechanism, and show that the data do not confirm these implications. We then turn to models of adverse selection that predict a negative relationship between haircuts and interest rates, based on the use of collateral as a screening mechanism. We find this negative relationship only for those trades in which the securities dealers are receiving U.S. Treasury securities and delivering cash.

Suggested Citation

  • Baklanova, Viktoria & Caglio, Cecilia & Cipriani, Marco & Copeland, Adam, 2016. "The use of collateral in bilateral repurchase and securities lending agreements," Staff Reports 758, Federal Reserve Bank of New York, revised 01 Oct 2017.
    • Handle: RePEc:fip:fednsr:758
    Note: Previous title: "A New Survey of the U.S. Bilateral Repo Market: A Snapshot of Broker-Dealer Activity"
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    References listed on IDEAS

    as
    1. Ana Fostel & John Geanakoplos, 2012. "Leverage and Default in Binomial Economies: A Complete Characterization," Cowles Foundation Discussion Papers 1877RRR, Cowles Foundation for Research in Economics, Yale University, revised Mar 2015.
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    3. Fleming, Michael J. & Garbade, Kenneth D., 2007. "Dealer behavior in the specials market for US Treasury securities," Journal of Financial Intermediation, Elsevier, vol. 16(2), pages 204-228, April.
    4. Viktoria Baklanova & Cecilia Caglio & Frank Keane & Burt Porter, 2016. "A Pilot Survey of Agent Securities Lending Activity," Working Papers 16-08, Office of Financial Research, US Department of the Treasury.
    5. Piero Gottardi & Vincent Maurin & Cyril Monnet, 2019. "A theory of repurchase agreements, collateral re-use, and repo intermediation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 30-56, July.
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    Cited by:

    1. Breach , Tomas & King, Thomas B., 2018. "Securities Financing and Asset Markets: New Evidence," Working Paper Series WP-2018-22, Federal Reserve Bank of Chicago.
    2. repec:red:issued:19-0 is not listed on IDEAS
    3. W. Arrata & B. Nguyen & I. Rahmouni-Rousseau & M. Vari, 2017. "Eurosystem’s asset purchases and money market rates," Working papers 652, Banque de France.

    More about this item

    Keywords

    repo; securities lending; adverse selection; haircut;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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