The use of collateral in bilateral repurchase and securities lending agreements

Viktoria Baklanova, Cecilia R. Caglio, Marco Cipriani and Adam Copeland
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Cecilia R. Caglio: https://www.federalreserve.gov/econres/cecilia-r-caglio.htm

No 758, Staff Reports from 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.

Keywords: repo; securities lending; adverse selection; haircut (search for similar items in EconPapers)
JEL-codes: E44 G12 G24 (search for similar items in EconPapers)
Date: 2016-01-01
New Economics Papers: this item is included in nep-mac
Note: Previous title: "A New Survey of the U.S. Bilateral Repo Market: A Snapshot of Broker-Dealer Activity"
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Citations: View citations in EconPapers (7)

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Journal Article: The Use of Collateral in Bilateral Repurchase and Securities Lending Agreements (2019)
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