The US Office of Financial Research published a paper on US Treasury (UST) triparty repo pricing. The US triparty repurchase agreement (repo) market is a vast, over-the-counter (OTC) system, handling more than $2 trillion in daily transactions.
This market provides essential funding for a diverse range of institutions and plays a critical role in US monetary policy. Despite its significance though, pricing for securities in this market — and for Treasuries in particular — remains misunderstood. These transactions have negligible maturity, collateral, and counterparty risk, yet, there are significant differences in the prices that market participants receive.
In their working paper, “Treasury Tri-Party Repo Pricing,” Mark Paddrik, acting deputy director for Research & Analysis, and Carlos Ramirez, Federal Reserve Board principal economist, seek to address this gap. Using a confidential, comprehensive transaction-level dataset, the authors examine how market frictions influence tri-party repo pricing.
Focusing on overnight Treasury triparty repos, the authors isolate the impact of participants’ bargaining power. Their findings reveal that market participants receive different pricing depending on whom they borrow from or lend to. What influences the rate and haircut that firms receive are relationship factors such as (1) the number of counterparties traded with, (2) the degree of diversification across those counterparties, and (3) the share of overall market activity those counterparties represent.
Importantly, during periods of market stress, these factors can substantially alter the pricing dynamics for borrowers. The authors investigate how pricing impacts shift under stress conditions, finding that borrowers experience reduced rate volatility only when trading with larger, more active lenders. For lenders, however, the effects of diversification become more pronounced: Those lenders with a broader range of counterparties are able to secure higher rates during stressful periods because bargaining power tends to favor lenders in times of financial strain.