Working Paper: NBER ID: w21502
Authors: Grace Xing Hu; Jun Pan; Jiang Wang
Abstract: In this paper, we examine the pricing determinants in the systemically important tri-party repo market. Taking advantage of the recently available N-MFP reports filed by money market funds, we construct a novel dataset that contains tri-party repo transactions between money market funds and dealer banks. We find a large cross-sectional heterogeneity in repo pricing, reflected most significantly in the haircuts of repos backed by equity and corporate bonds. Surprisingly, it is the fund families, not bank dealers, who are the dominant factor in determining the pricing. Moreover, the repo market exhibits significant segmentation, with fund families adopting three different pricing schemes: counter-party sensitive, counter-party and collateral sensitive, and uniform. Most fund families use uniform haircuts by fixing a constant haircut, which itself varies across families, for all repos within each asset class, regardless of the quality of collateral or counter-party. Investigating further on the lending/borrowing relationship between fund families and dealers, we find that, when faced with such a rich pricing pattern, dealers do not shop around for a better haircut and are inclined to maintain a stable relationship with their lenders. Finally, for repos backed by Treasury securities, there is little variation in both haircuts and spreads, regardless of the fund family.
Keywords: Triparty Repo; Pricing Determinants; Money Market Funds
JEL Codes: G1; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fund family characteristics (J12) | haircut levels (C24) |
| collateral quality (L15) | haircut levels (C24) |
| counterparty risk (G33) | haircut levels (C24) |
| fund families (J12) | pricing schemes (D49) |
| concentration of market power among fund families (G23) | dealer behavior (L14) |
| fund family characteristics (J12) | pricing dynamics in triparty repo market (G19) |
| haircuts applied to repos (C59) | repo pricing (D49) |