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  • Open Daily: 10am - 10pm
    Alley-side Pickup: 10am - 7pm

    3038 Hennepin Ave Minneapolis, MN
    612-822-4611

Open Daily: 10am - 10pm | Alley-side Pickup: 10am - 7pm
3038 Hennepin Ave Minneapolis, MN
612-822-4611
Liquidity Windfalls: The Consequences of Repo Rehypothecation

Liquidity Windfalls: The Consequences of Repo Rehypothecation

Federal Reserve Board

Paperback

Business General

ISBN10: 1511660414
ISBN13: 9781511660419
Publisher: Createspace
Published: Apr 12 2015
Pages: 34
Weight: 0.23
Height: 0.07 Width: 8.50 Depth: 11.02
Language: English
This paper presents a model of repo rehypothecation in which dealers intermediate funds and collateralbetween cash lenders (e.g., money market funds) and prime brokerage clients (e.g., hedge funds).Dealers take advantage of their position as intermediaries, setting different repo terms with each counterparty.In particular, the difference in haircuts represents a positive cash balance for the dealer thatcan be an important source of liquidity. The model shows that dealers with higher default risk are moreexposed to runs by collateral providers than to runs by cash lenders, who are completely insulated froma dealer's default. In addition, collateral providers' repo terms are sensitive to changes in a dealer's defaultprobability and its correlation with the collateral's outcome, whereas cash lenders' repo terms areunaffected by these changes. This paper rationalizes the difference in haircuts observed in bilateral andtri-party repo markets, reconciles the partial evidence of the run on repo during the recent financial crisis, and presents new empirical evidence to support the model's main prediction on haircut sensitivities

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