The Tri-Party Repo Market before the 2010 Reforms

Abstract

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Complexity, concentration and contagion: A comment

“…In fact, the largest market for such transactions is the tri-party repo market, and in a New York Fed study, Copeland, Martin, and Walker (2010) The availability of the tri-party repo market for borrowing, the existence of unencumbered collateral in the banking sector, and the ability to raise equity directly in public markets strongly suggests that banks had a number of backstops that could have limited the propagation of the type of shocks discussed in this paper. Therefore, if liquidity was truly an issue during this period, we must ask where the particular capital market imperfections are, and address them directly.…”

“…A case in point is the U.S. auction rate securities markets which, for many years, allowed corporations and municipalities to fund billions of dollars of short-term borrowing at very competitive rates because these auction markets were highly liquid, in In addition, U.S. banks already have access to the Federal Reserve's discount window for short-term borrowing needs, and the Fed has deemed a remarkably broad range of collateral to be acceptable-including agricultural and raw land loans (see Table 2)-precisely to deal with the occasional liquidity crunches in the banking sector. Even with these and other Fed facilities, Copeland, Martin, and Walker (2010) conclude that ". .…”

Liquidating illiquid collateral

“…Arguably, all of these factors contributed to the unprecedented rise in haircuts observed in the bilateral repo market in 2007 and 2008, documented in Gorton and Metrick [23]. Moreover, consistent with Proposition 5, more illiquid forms of collateral (for example, mortgage-backed securities) experienced larger increases in haircuts than the most liquid forms of collateral, most notably Treasuries, where haircuts even decreased due to flight to quality (as documented, for example, in Copeland et al [15]). …”

“…This implies that the aggregate 15 A similar argument applies when the variance constraint is not binding but traders compete to sell. In that case, delaying the sale of a marginal unit is costly because competing sellers sell in the meantime, driving down the price.…”

“…15 We can now calculate the expected liquidation value of the collateral position by substituting back into the objective function.…”