Tri-Party Repo Pricing / Grace Xing Hu, Jun Pan, Jiang Wang.

By:

Hu, Grace Xing

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w21502.Publication details: Cambridge, Mass. National Bureau of Economic Research 2015.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: In this paper, we examine the pricing determinants in the systemically important tri-party repo market. Taking advantage of the recently available N-MFP reports filed by money market funds, we construct a novel dataset that contains tri-party repo transactions between money market funds and dealer banks. We find a large cross-sectional heterogeneity in repo pricing, reflected most significantly in the haircuts of repos backed by equity and corporate bonds. Surprisingly, it is the fund families, not bank dealers, who are the dominant factor in determining the pricing. Moreover, the repo market exhibits significant segmentation, with fund families adopting three different pricing schemes: counter-party sensitive, counter-party and collateral sensitive, and uniform. Most fund families use uniform haircuts by fixing a constant haircut, which itself varies across families, for all repos within each asset class, regardless of the quality of collateral or counter-party. Investigating further on the lending/borrowing relationship between fund families and dealers, we find that, when faced with such a rich pricing pattern, dealers do not shop around for a better haircut and are inclined to maintain a stable relationship with their lenders. Finally, for repos backed by Treasury securities, there is little variation in both haircuts and spreads, regardless of the fund family.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w21502 (Browse shelf(Opens below))	Not For Loan

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August 2015.

In this paper, we examine the pricing determinants in the systemically important tri-party repo market. Taking advantage of the recently available N-MFP reports filed by money market funds, we construct a novel dataset that contains tri-party repo transactions between money market funds and dealer banks. We find a large cross-sectional heterogeneity in repo pricing, reflected most significantly in the haircuts of repos backed by equity and corporate bonds. Surprisingly, it is the fund families, not bank dealers, who are the dominant factor in determining the pricing. Moreover, the repo market exhibits significant segmentation, with fund families adopting three different pricing schemes: counter-party sensitive, counter-party and collateral sensitive, and uniform. Most fund families use uniform haircuts by fixing a constant haircut, which itself varies across families, for all repos within each asset class, regardless of the quality of collateral or counter-party. Investigating further on the lending/borrowing relationship between fund families and dealers, we find that, when faced with such a rich pricing pattern, dealers do not shop around for a better haircut and are inclined to maintain a stable relationship with their lenders. Finally, for repos backed by Treasury securities, there is little variation in both haircuts and spreads, regardless of the fund family.