Federal Reserve Board staff published a FEDS Notes setting out a framework for “proportionate” margining in repurchase agreement (repo) markets, arguing that haircuts should align with counterparty default risk, collateral risk, and net exposures across the full portfolio of trades between counterparties. The note argues that imposing minimum haircut floors for Treasury repo would often fail to produce risk-aligned protection and could reduce liquidity without a commensurate increase in resilience. The analysis contrasts centrally cleared repo at the Fixed Income Clearing Corporation (FICC), where margins are set through risk-based models, with non-centrally cleared tri-party and bilateral markets, where haircuts are negotiated bilaterally and are effectively zero-sum between lender and borrower. It cites evidence that tri-party Treasury repo haircuts have been broadly uniform around 2%, while around 70% of Treasury transactions in the non-centrally cleared bilateral repo segment are reported to have zero haircuts and just under 10% have negative haircuts. Against that backdrop, the note explains why a minimum positive haircut can be misaligned in trades where the borrower needs protection from a riskier lender, and illustrates a Value-at-Risk-based approach in which the appropriate haircut can be positive or negative depending on the relative default risk of each party and the distribution of collateral returns. For relationships covered by master netting agreements, it argues margining should be set on the portfolio exposure, including for “netted packages” that account for more than 60% of hedge fund activity in non-centrally cleared bilateral repo, and it discusses cross-margining across repo and derivatives where default exposures can offset. The note points to implementation of the Securities and Exchange Commission’s Treasury repo central clearing rule as a potential enabler of more portfolio-based, proportionate margining in dealer-to-customer trades as activity is novated to FICC, including through possible CCP-supported services that recommend margin levels based on transaction terms and collateral.
Federal Reserve Board 2025-02-14
Federal Reserve Board staff propose proportionate margining for repo and caution against imposing minimum Treasury repo haircuts
The Federal Reserve Board staff published a FEDS Notes outlining a framework for proportionate margining in repo markets, emphasizing alignment with counterparty default risk, collateral risk, and net exposures. The analysis contrasts centrally cleared repo at the Fixed Income Clearing Corporation with non-centrally cleared markets, highlighting limitations of minimum haircut floors. It suggests a Value-at-Risk-based approach and discusses the potential impact of the SEC’s Treasury repo central clearing rule on margining practices.