The Use of Collateral in Bilateral Repurchase and Securities Lending Agreements

58 Pages Posted: 14 Jan 2016 Last revised: 26 Oct 2017

See all articles by Viktoria Baklanova

Viktoria Baklanova

Federal Reserve Bank of New York

Cecilia Caglio

Board of Governors of the Federal Reserve System

Marco Cipriani

Federal Reserve Bank of New York

Adam M. Copeland

Federal Reserve Bank of New York

Date Written: 2016-01-01

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.

Keywords: repo, securities lending, adverse selection, haircut

JEL Classification: E44, G12, G24

Suggested Citation

Baklanova, Viktoria and Caglio, Cecilia and Cipriani, Marco and Copeland, Adam M., The Use of Collateral in Bilateral Repurchase and Securities Lending Agreements (2016-01-01). FRB of NY Staff Report No. 758, Available at SSRN: https://ssrn.com/abstract=2715409

Viktoria Baklanova (Contact Author)

Federal Reserve Bank of New York ( email )

33 Maiden Lane
New York, NY 10045
United States

Cecilia Caglio

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Marco Cipriani

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Adam M. Copeland

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
138
Abstract Views
792
rank
235,428
PlumX Metrics