What Drives Repo Haircuts? Evidence from the UK Market

62 Pages Posted: 22 Aug 2019 Last revised: 27 Jan 2025

See all articles by Christian Julliard

Christian Julliard

London School of Economics & Political Science (LSE) - Department of Finance; Centre for Economic Policy Research (CEPR)

Gabor Pinter

Bank for International Settlements (BIS)

Karamfil Todorov

Bank for International Settlements

Kathy Yuan

London School of Economics & Political Science (LSE) - Department of Finance

Date Written: January 30, 2019

Abstract

Using a unique transaction-level data, we document that only 61% of bilateral repos held by UK banks are backed by high quality collateral. Banks intermediate repo liquidity among different counterparties, and use CCPs to reallocate high-quality collaterals among themselves and exploit netting benefits. Furthermore, maturity, collateral rating and asset liquidity have important effects on repo liquidity via haircuts. Counterparty types also matter: non-hedge funds, large borrowers, and borrowers with repeated bilateral relationships receive lower (or zero) haircuts. Furthermore, we observe a pecking order in the posting of collateral, with higher quality one more likely to be used first. Overall, the evidence supports a first order role of information frictions in driving haircuts. In contrast, we do not find significant roles in the data for lenders’ liquidity position or default probabilities.

Keywords: repurchase agreement, systemic risk, repo market, margin, haircut.

JEL Classification: G12, G21, G23, E43, E58

Suggested Citation

Julliard, Christian and Pinter, Gabor and Todorov, Karamfil and Yuan, Kathy Zhichao, What Drives Repo Haircuts? Evidence from the UK Market (January 30, 2019). Available at SSRN: https://ssrn.com/abstract=3374969 or http://dx.doi.org/10.2139/ssrn.3374969

Christian Julliard

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Gabor Pinter

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Karamfil Todorov (Contact Author)

Bank for International Settlements ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Kathy Zhichao Yuan

London School of Economics & Political Science (LSE) - Department of Finance ( email )

Old Building
Houghton Street
London, London WC2A 2AE
United Kingdom
+44 (0)20 7955 6407 (Phone)
+44 (0)20 7849 4647 (Fax)

HOME PAGE: http://fmg.lse.ac.uk/~kathy

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