Repos, Fire Sales, and Bankruptcy Policy

Antinolfi, Gaetano; Carapella, Francesca; Kahn, Charles M.; Martin, Antoine; Mills, David C.; Nosal, Ed

doi:10.2139/ssrn.2189583

Cited by 16 publications

(13 citation statements)

References 3 publications

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“…As a short-term debt instrument to finance long-term assets, Zhang (2014) and Martin et al (2014) show that repos are subject to roll-over risk. Antinolfi et al (2015) show that the benefit of an exemption from automatic stay 6 granted to repos may be harmful for social welfare in the presence of fire sales, a point also made by Infante (2013) and Kuong (2015).…”

Section: Relation To the Literaturementioning

confidence: 78%

A theory of repurchase agreements, collateral re-use, and repo intermediation

Gottardi

Maurin

Monnet

2019

Review of Economic Dynamics

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We show that repurchase agreements (repos) arise as the instrument of choice to borrow in a competitive model with limited commitment. The repo contract traded in equilibrium provides insurance against fluctuations in the asset price in states where collateral value is high and maximizes borrowing capacity when it is low. Haircuts increase both with counterparty risk and asset risk. In equilibrium, lenders choose to re-use collateral. This increases the circulation of the asset and generates a "collateral multiplier" effect. Finally, we show that intermediation by dealers may endogenously arise in equilibrium, with chains of repos among traders.

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Section: Relation To the Literaturementioning

confidence: 78%

A theory of repurchase agreements, collateral re-use, and repo intermediation

Gottardi

Maurin

Monnet

2019

Review of Economic Dynamics

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“…Recent papers by Antinolfi et al. (), Acharya, Anshuman, and Viswanathan (), and Auh and Sundaresan () also offer an ex ante and ex post analysis of exemptions from the automatic stay, but with a specific focus on repo contracts. Oehmke () provides a model of collateral fire sales that can occur after defaults in the repo markets.…”

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confidence: 99%

Should Derivatives Be Privileged in Bankruptcy?

Bolton¹,

Oehmke

2015

The Journal of Finance

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Derivatives enjoy special status in bankruptcy: They are exempt from the automatic stay and effectively senior to virtually all other claims. We propose a corporate finance model to assess the effect of these exemptions on a firm's cost of borrowing and its incentives to engage in efficient derivative transactions. While derivatives are value-enhancing risk management tools, seniority for derivatives can lead to inefficiencies: It transfers credit risk to debtholders, even though this risk is borne more efficiently in the derivative market. Seniority for derivatives is efficient only if it provides sufficient cross-netting benefits to derivative counterparties that provide hedging services. * Bolton is at Columbia University, NBER, and CEPR. Oehmke is at Columbia University. For helpful comments and suggestions, we thank two anonymous referees, an associate editor, Viral Acharya, Jun Kyung Auh, Ulf Axelson, Ken Ayotte, Mike Burkart, Doug Diamond, Darrell Duffie, Yaniv Grinstein, Oliver Hart, Gustavo Manso, Ed Morrison, David Scharfstein, Ken Singleton (editor), Jeremy Stein, Suresh Sundaresan, Vikrant Vig, Jeff Zwiebel, and seminar participants at Columbia University, the UBC Winter Finance Conference, Temple University, University of Rochester, the Moody's/LBS Credit Risk Conference, LSE, LBS, Stockholm School of Economics, Mannheim, HEC, INSEAD, CEU, the 2011 ALEA meetings, the 4th annual Paul Woolley Conference, the 2011 NBER Summer Institute, ESSFM Gerzensee, the 2011 SITE Conference, ESMT Berlin, Harvard Law School, Harvard Business School, Chicago Booth, University of Amsterdam, EPF Lausanne, Stanford GSB, Berkeley, the NY Fed workshop on the automatic stay, the 2012 WFA meetings, Wharton, and Boston University.Derivative contracts enjoy special status under U.S. bankruptcy law: Derivative counterparties are exempt from the automatic stay, and-through netting, closeout, and collateralization provisionsthey are generally able to immediately collect payment from a defaulted counterparty. 1 Taken together, these special provisions make derivative counterparties effectively senior to almost all other claimants in bankruptcy. The costs and benefits of this special treatment are the subject of a recent debate among legal scholars, policymakers, and regulators. Notably, this debate is characterized by considerable disagreement about the costs and benefits of the special bankruptcy treatment of derivatives, which is reflected in substantial differences in the bankruptcy treatment of derivatives across different jurisdictions. 2 In this paper we provide the first formal analysis of the economic consequences of the privileged treatment of derivative contracts in bankruptcy. The fundamental observation underlying our analysis is that (effective) seniority for derivatives does not eliminate default risk-it transfers default risk from derivative counterparties to other claimholders, particularly creditors. The desirability of seniority for derivatives thus depends on whether default risk is more efficiently bor...

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“…Another related work is the paper by Antinolfi et al. (), which characterizes a repo as a secured loan and analyzes the general‐equilibrium effects of automatic stay on a repo. This paper adds to their work by analyzing the effect of automatic stay on a repo for a short‐term investor…”

Section: Related Literaturementioning

confidence: 99%

Investment Horizon and Repo in the Over-the-Counter Market

Tomura¹

2016

Journal of Money, Credit and Banking

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This paper presents a three-period model featuring a short-term investor in the over-the-counter bond market. A short-term investor stores cash because of a need to pay cash at some future date. If a short-term investor buys bonds, then a deadline for retrieving cash lowers the resale price of bonds for the investor through bilateral bargaining in the bond market. Ex-ante, this holdup problem explains the use of a repo by a short-term investor, the existence of a haircut, and the vulnerability of a repo market to counterparty risk. This result holds without any uncertainty about bond returns or asymmetric information.JEL codes: G24 Keywords: repo, over-the-counter market, securities broker-dealer; short-term investor; haircut.A REPO IS ONE OF THE PRIMARY instruments in the money market. In this transaction, a short-term investor buys long-term bonds with a repurchase agreement in which the seller of the bonds promises to buy back the bonds at a later date. From the seller's point of view, this transaction is akin to a secured loan with the underlying bonds as collateral. A question remains, however, regarding why a short-term investor needs a repurchase agreement when the investor can simply resell bonds to a third party in a spot market. The answer to this question is not immediately I thank

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Repos, Fire Sales, and Bankruptcy Policy

Cited by 16 publications

References 3 publications

A theory of repurchase agreements, collateral re-use, and repo intermediation

A theory of repurchase agreements, collateral re-use, and repo intermediation

Should Derivatives Be Privileged in Bankruptcy?

Investment Horizon and Repo in the Over-the-Counter Market

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