The Bank for International Settlements published a BIS Bulletin analysing what drives repo haircuts and how haircut setting affects leverage in repo-funded strategies. Using a new granular dataset, the authors find that haircut levels cannot be interpreted without distinguishing whether a repo is primarily used to raise cash or to obtain a particular security, since the same haircut can imply very different risk buffers depending on the underlying motive. The Bulletin proposes a three-way classification of repo trades into funding-driven general collateral trades, specific collateral trades, and “specials” where the repo rate is at least 10 basis points below the relevant policy rate benchmark and collateral-sourcing motives dominate. In the data, collateral-driven activity is more prevalent than funding-driven activity, with “specials” particularly pronounced in the euro and easing since quantitative tightening began. Haircuts tend to rise with repo maturity and with more volatile collateral types, while benchmark sovereign bonds are associated with lower haircuts; in euro repos, 10-year sovereign bonds show notably subdued haircuts consistent with benchmark scarcity value. Clearing arrangements also matter, with centrally cleared euro repos showing portfolio-based initial margins of around 2–4% rather than transaction-level haircuts, and triparty repos displaying higher haircuts consistent with their funding-driven use. For bilateral repos, the analysis highlights substantial dispersion linked to market power and trading relationships, and finds that hedge fund cash borrowing is dominated by zero-haircut transactions even after excluding portfolio-margined net exposure trades (around 40% of bilateral transactions), with the largest hedge funds receiving the lowest haircuts and therefore the highest attainable leverage. The authors note that these patterns bear on proposals for uniform minimum haircut requirements, which could limit leverage build-up but may also favour cash lenders over collateral lenders in collateral-driven segments.
Bank for International Settlements 2025-12-02
Bank for International Settlements research finds repo haircuts hinge on cash versus collateral motives and enable high hedge fund leverage
The Bank for International Settlements released a BIS Bulletin examining repo haircuts and their impact on leverage in repo-funded strategies. The analysis highlights the importance of distinguishing between funding-driven and collateral-driven repo trades, with "specials" prominent in euro repos. The findings suggest that uniform minimum haircut requirements could affect leverage dynamics and favor cash lenders in collateral-driven segments.