The same transaction has two perspectives
In a repurchase agreement, one party transfers securities for cash and agrees to repurchase them later. Economically, that party borrows against collateral; the other lends cash. The borrower calls it a repo and the cash lender a reverse repo. The New York Fed’s September 28, 2026 explanation describes a market linking cash investors, dealers, leveraged investors and other institutions. A dealer can borrow from one participant and lend to another. [1]
This is different from an unsecured deposit. The cash investor receives contractual rights involving specified collateral, but still depends on valuation, enforceability and an orderly closeout if repayment fails. It is also different from an outright sale that permanently removes the seller’s exposure. A repurchase obligation brings the transaction back at its agreed maturity.
Cash demand and security demand can produce different prices
In general-collateral funding, a lender accepts securities meeting a defined set of eligibility conditions. In a security-driven transaction, the attraction may be one specific issue needed for delivery or another position. The New York Fed notes that repo cash lenders may seek either a short-term investment or a specific security. [1] These motives explain why two overnight secured transactions can have different rates without either being incorrectly quoted.
Analysis: a participant that strongly needs a particular bond may accept less interest on the cash supplied to obtain it. That security trades special relative to more interchangeable collateral. A lower repo rate can therefore indicate scarcity of the security rather than abundant cash everywhere. The interpretation changes again if rates rise broadly across collateral types and borrowers.
Contract tenor matters independently of rate. Overnight funding must be replaced or repaid quickly; term funding commits cash for longer but can cost more or contain different collateral and margin provisions. Matching a long-lived asset with repeated overnight borrowing creates exposure to future funding conditions even if the asset itself remains creditworthy.
Hypothetical haircut: what actually funds the asset?
Define the haircut here as one minus cash advanced divided by collateral market value. With $50 million of securities and a 2% haircut, a lender provides $49 million. The borrower supplies the remaining $1 million from its own resources or another source. Under a hypothetical 5% annual repo rate and an actual/360 convention, one day’s interest is $49 million × 5% ÷ 360, or $6,805.56.
The haircut is not the interest charge. It limits the cash advanced relative to collateral; interest pays for use of the cash over time. Nor is a 2% haircut the same arithmetic as requiring collateral equal to 102% of the loan. At a 2% haircut, collateral divided by cash is 1/0.98, or approximately 102.0408%. Contract definitions control the calculation.
The example’s $50 million asset position is 50 times the $1 million residual financing contribution. That is a narrow transaction-level illustration, not a measure of the borrower’s total leverage. Other assets, hedges, capital, netting and liabilities could change the firm-wide picture substantially.
A price fall and a haircut increase can arrive together
Continue the hypothetical example. Collateral value falls by 1% to $49.5 million. At the original 2% haircut, it supports only $48.51 million of borrowing. Against $49 million outstanding, the difference is $490,000, before interest. The agreement determines whether the borrower cures this with cash, eligible additional collateral or another permitted step.
Now suppose the haircut on replacement funding rises to 4%. The same $49.5 million of assets supports $47.52 million, leaving a $1.48 million financing gap relative to the original loan. Of that gap, $490,000 comes from the price decline at the old haircut and $990,000 from the additional two percentage points of haircut on the new collateral value.
The asset has lost $500,000 in market value, but maintaining its financing now requires substantially more cash than that loss alone. Selling part of the position may meet the demand while reducing market exposure; doing so in a falling market can deepen the loss. This is the mechanism of a funding feedback loop, not a claim that every price decline triggers one.
A zero haircut does not explain the whole risk arrangement
OFR’s May 12, 2023 research used a pilot covering nine dealers on three dates in June 2022. It found that more than 70% of Treasury volume in that non-centrally cleared bilateral sample had zero haircut. The study emphasized differences in margining and netting across market segments. The sample is historical and limited; it does not establish today’s market-wide share or imply a universal zero-margin rule. [2]
OFR researchers’ August 12, 2025 analysis used the new daily collection covering January 2–May 30, 2025. Zero haircuts accounted for 56% of outstanding non-centrally cleared bilateral repo, or 42% after excluding affiliated-counterparty activity. More than 60% of Treasury-backed repo outstanding within that segment had zero haircuts. The all-collateral shares have a different denominator from the earlier Treasury-only pilot result, and the collection’s coverage also differs. These figures alone do not establish a decline in risk. The authors said further research was needed to determine what proportion of repo lacked other risk mitigants. [5]
BIS researchers’ July 2022 study of UK repo similarly found that counterparty type, repeated relationships and collateral characteristics influenced haircuts. It is evidence that the haircut is partly a negotiated credit and intermediation term, not simply a mechanical measure of a bond’s volatility. The UK findings are not U.S. regulatory requirements. [3]
Analysis: a zero haircut on an individual ticket can coexist with collateral held against a broader portfolio, enforceable netting or tight limits. Alternatively, it can leave a lender less protected. The ticket alone cannot distinguish those situations. A larger haircut can provide a cushion against liquidation loss while also increasing a borrower’s demand for cash. Its benefit to one institution and its system-wide effect are related but different questions.
Settlement agents, clearing and central-bank facilities
A tri-party arrangement uses an agent to administer collateral and settlement. Central clearing instead interposes a central counterparty and can permit multilateral netting. These are different dimensions, as OFR’s market map demonstrates; having a settlement agent does not itself make a transaction centrally cleared or eliminate counterparty exposure. [2]
The New York Fed’s official operations page distinguishes its repo purchases, which temporarily add reserve balances, from reverse repos, which temporarily reduce them. These operations implement monetary policy under Federal Open Market Committee direction. They have specified counterparties and terms, rather than being an automatic funding entitlement for every private borrower. This article does not quote a current facility rate, size limit or eligibility list. [4]
Consequently, a private repo-market disruption cannot be diagnosed solely by the existence of a Federal Reserve facility. Access, collateral eligibility, timing and willingness to use it determine whether it reaches the institution facing the shortage. A stable policy target and volatile private financing costs can coexist when the problem concerns distribution or balance-sheet capacity rather than the aggregate quantity of reserves.
The evidence behind a funding story
A useful account of repo stress separates the interest rate, haircut, collateral price, tenor, margin timing and ability to renew. Higher rates alone reduce earnings; a refusal to renew requires cash equal to the maturing principal unless another source is available. Those are very different magnitudes and mechanisms.
Evidence of rising rates across comparable trades, shortened maturities and reduced counterparty limits would support a broad funding-pressure explanation. An isolated cheap rate on a scarce issue points elsewhere. Repo makes securities easier to finance and trade, but the same short-term link means that collateral quality, contractual protection and available cash must remain aligned throughout the transaction, not just on the day it begins.
Sources
- New York Fed Liberty Street Economics, Who’s Borrowing and Lending in Repo Markets?, September 28, 2026Official sourceBack to text: ↑1↑2
- OFR Brief 23-01, Why Is So Much Repo Not Centrally Cleared?, May 12, 2023; June 2022 pilot dataOfficial source · PDFBack to text: ↑1↑2
- BIS Working Paper 1027, What drives repo haircuts? Evidence from the UK market, July 6, 2022Technical reportBack to text: ↑
- New York Fed, Repo and Reverse Repo Agreements; checked October 4, 2026Official sourceBack to text: ↑
- OFR, Are Zero-Haircut Repos as Common as Advertised?, August 12, 2025; January 2–May 30, 2025 dataOfficial sourceBack to text: ↑