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Tri-Party Repo Pricing

Published online by Cambridge University Press:  05 June 2020

Grace Xing Hu ,
Jun Pan Open the ORCID record for Jun Pan [Opens in a new window]  and
Jiang Wang
Grace Xing Hu
Affiliation:
Hu, hux@pbcsf.tsinghua.edu.cn, Tsinghua University PBC School of Finance
Jun Pan*
Affiliation:
Pan, junpan@saif.sjtu.edu.cn, Shanghai Jiao Tong University Shanghai Advanced Institute of Finance, China Academy of Financial Research (CAFR), and National Bureau of Economic Research (NBER)
Jiang Wang
Affiliation:
Wang, wangj@mit.edu, MIT Sloan School of Management, CAFR, and NBER
*
Pan (corresponding author), junpan@saif.sjtu.edu.cn
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Abstract

We document the central role of collateral in the pricing of tri-party repos. Markets are competitive for repos with safe collateral but are severely segmented for repos with risky collateral, such as equities and low-grade corporate bonds. Fund families are the sole contributors to the segmentation, and collateral concentration is the main determinant in the substantial variation in repo pricing, both across and within segments. The segmented structure points to Fidelity as a systemically important player and the markets potential fragility. Facing market segmentation, dealers optimize financing costs by allocating their collateral across fund families.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 1 , February 2021 , pp. 337 - 371
Copyright
© Michael G. Foster School of Business, University of Washington 2019

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Footnotes

We have benefited from comments from and discussions with Hendrik Bessembinder (the editor), Darrell Duffie, Dmitry Orlov, Zhaogang Song (the referee), Fan Yu, Haoxiang Zhu, and seminar participants at the 2015 Western Finance Association (WFA) Meeting and the China International Conference in Finance (CICF) Meeting. We thank Ai He, Yue Hu, Bo Meng, and Xiang Yun for excellent research assistance. Financial support from the Hong Kong Research Grants Council (RGC) (Project 17501014) and the CAFR is gratefully acknowledged.

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