Tri-Party Repo Pricing

We document the central role of repo collateral in tri-party repo pricing. Markets are competitive for repos with safe collaterals, but are severely segmented for repos with risky collaterals such as equities and low-grade corporate bonds. Fund families are the sole contributors of the segmentation, and collateral concentration is the main determinant in the substantial variation in repo pricing, both across and within segments. The segmented structure points to Fidelity as a systemically important player and the markets potential fragility. Facing market segmentation, dealers act mostly as price-takers but allocate their collateral across fund families to reduce total financing cost. ∗Hu ([email protected]) is from University of Hong Kong, Pan ([email protected]) and Wang ([email protected]) are from MIT Sloan School of Management, CAFR, and NBER. We have benefited from comments from and discussions with Darrell Duffie, Haoxiang Zhu, Dmitry Orlov, Fan Yu, and seminar participants at the WFA 2015 and CICF 2015 meetings. We thank Bo Meng, Ai He, Xiang Yun and Yue Hu for excellent research assistance. Financial support from a Hong Kong RGC Research Grant (Project #17501014) and CAFR is gratefully acknowledged.