Accessible Version
Proportionate margining for repo transactions, Accessible Data
Figure 1. Haircuts and margining in a typical repo transaction
A diagram illustrating the cash and securities exchange in a repurchase agreement (repo) with a positive haircut between a lender and a borrower. The lender provides cash to the borrower, and the borrower provides securities as collateral. A haircut (h) is applied, meaning the securities posted as collateral exceed the cash amount lent. If no default occurs, the borrower returns the cash, and the lender returns the securities. If a default occurs, the lender retains the securities, including the haircut amount.
Note: This figure shows a transaction with a positive haircut of h, implying that the value of securities provided exceeds the value of cash with 1+h dollars of securities to every dollar of cash.
Figure 2. Outstanding volumes by haircut in NCCBR
The figure presents two bar charts displaying the distribution of outstanding non-centrally cleared bilateral repo (NCCBR) trades by haircut levels.
- Left chart (Treasury Trades): The x-axis represents different haircut categories: < -2, -2 to 0, 0, 0 to 2, and >2. The y-axis shows the amount outstanding in billions of dollars, ranging from $ 0 to $600 billion. Treasury trades are predominantly concentrated at a 0% haircut, with approximately 593.9 billion outstanding. Other significant amounts include 108.9 billion at 0 to 2%, 40.6 billion at -2 to 0%, 38.0 billion at >2%, and 21.6 billion at < -2%.
- Right chart (All Other Trades): The x-axis follows the same haircut categories, and the y-axis is the same as for the top chart. Most outstanding amounts are concentrated at >2% (43.7%) and 0 to 2% (34.0%). Other categories include 26.2% at 0%, 2.0% at -2 to 0%, and **0.0% at < -2%.
Source: Hempel et al. (2023b).
Figure 3. Haircuts and margining in a negative-haircut transaction
A diagram illustrating a repo agreement with a negative haircut, where the collateral value is lower than the cash borrowed. The lender provides cash, and the borrower posts securities as collateral. A negative haircut means the collateral posted is worth less than the cash received. The formula (1−h)/(1+h) is displayed, indicating how the negative haircut affects collateralization. If no default occurs, the securities are returned to the borrower. If a default occurs, the lender retains the collateralized securities.
Note: This figure shows a transaction with a negative haircut of h, implying that the value of cash provided exceeds the value of securities with 1−h/(1+h) dollars of cash to every dollar of securities (this is mathematically equivalent to 1+h<1 dollars of securities to every dollar of cash as in Figure 2).
Figure 4. Example of a netted package
A diagram depicting a hedge fund engaging in two offsetting repo transactions with a dealer as part of a netted package.
- Repo 1: The hedge fund delivers green securities to the dealer in exchange for cash.
- Repo 2: The hedge fund receives orange securities from the dealer and provides cash in return.
The transfer of cash in repo 1 from the dealer to the hedge fund is cancelled out by the transfer of cash from the hedge fund to the dealer in repo 2. As a result, in default, the dealer is left with the green securities and the hedge fund is left with the orange securities. If there is no default, the green securities are returned to the hedge fund and the orange securities are returned to the dealer.
Note: This figure shows an example of a netted package, where the cash legs of two repos offset each other, resulting in a temporary swap of securities.
Figure 5. Opportunities for cross-margining
Figure 5: The diagram compares two trading structures involving a hedge fund, repo borrowing, and short futures positions for the basis trade.
- Separate Dealers Structure: The hedge fund engages in repo borrowing with Dealer 1, providing Treasury collateral. Simultaneously, the hedge fund holds a short futures position with Dealer 2, creating a delivery obligation. Since different dealers handle each leg, exposures are isolated with no internal offsetting when a default event occurs and the hedge fund fails to meet their obligations.
- Single Dealer Structure: The hedge fund engages in repo borrowing and a short futures position with the same dealer (Dealer 1). In a default event, Treasury collateral from the repo borrowing is used to fulfill the delivery obligation of the short futures position. Therefore the exposures offset.