Even with these reasons in hand, that triparty haircuts are so uniformly at or near 2% regardless of market conditions suggests this may be a useful convention for traders trying to pack a lot of transactions into very little time, rather than carefully calibrated protection.

Reason 3: Many tri-party lenders are money market funds bound by 2a-7.

They are allowed to treat repo as an investment in the underlying security only if it is "collateralized fully," which may be interpreted as requiring a strictly positive haircut under the definition below.

Meanwhile, bilateral features a lot of both borrowing and lending by hedge funds to dealers, so sometimes it may be the dealer-borrower who need protection rather than the lender.

www.financialresearch.gov/briefs/files...

Three big reasons for the gap:

Reason 1: Counterparty risk in triparty is generally lower—triparty is mostly safe banks and money market funds lending to riskier dealers—so lenders generally demand protection.

www.federalreserve.gov/econres/note...

We also argue that cross-margining should be applied where practicable, for instance in cash-futures basis trades.

While cross-margining may allow greater leverage, it also reduces risk of firesales if volatility increases by accounting for correlations between cash and futures

More generally, proportionate margins reflect the full set of risks of exposures and collateral surrounding a transaction.

To the extent exposures offset, as for correlated collateral in a "netted package," that should be reflected in margin collected.

Our previous research showed that in this case, haircuts are often negative, to provide the dealer with protection against the hedge fund.

A consistent minimum haircut would undo this protection, since it would instead require a payment 𝘧𝘳𝘰𝘮 the dealer 𝘵𝘰 the hedge fund.

A positive haircut provides a cushion if the borrower defaults, helping the lender recover losses even if the collateral’s value dips or proves costly to liquidate.

Recently, there’s been growing concern about low or zero haircuts in repo markets.

In a new note, we argue that safety and liquidity can both be enhanced by setting repo margins that are 𝘱𝘳𝘰𝘱𝘰𝘳𝘵𝘪𝘰𝘯𝘢𝘵𝘦 to each counterparty’s actual risk.

www.federalreserve.gov/econres/note...

Thread below:

Just released: Update using N-PORT data running through 2024 Q4, live at j-kahn.com/nport/.

This data was compiled for our paper on mutual funds' use of Treasury futures: papers.ssrn.com/sol3/papers....

It's totally free, but we ask that if you use the data you cite the working paper

Excited to share our N-PORT data release is now live at j-kahn.com/nport/. Over 200K filings from mutual funds, ETFs & more since 2019 Q4.

This preliminary data has fund-level detail on portfolio allocations, maturities, notional derivatives, Treasury futures, and more!

Tracking the flow of collateral across markets allows us to see useful patterns such as the that most tri-party collateral is not sourced from other repo markets (since valuable collateral will be locked up) but bilateral markets are more likely to circulate and reuse collateral.

We find that dealers rehypothecate about 65% of the collateral they receive, but face a variety of risks in intermediating these flows.

(all credit to Mark and Robert for this novel way of organizing the data which brings out the transfer)

New brief out with Sam Hempel, @markpaddrik and Robert Mann using comprehensive data across all four segments of the U.S. repo market to track collateral flows and repo intermediation.

www.financialresearch.gov/briefs/files...