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FRM Part II · FRM Exam Part II · Repurchase Agreements and Financing

A broker-dealer finances a portfolio of corporate bonds through overnight tri-party repo. Which feature of this funding structure most directly exposes the dealer to a run-like withdrawal of financing during market stress?

The key run exposure is that overnight repo matures every day, so lenders can refuse to roll it or raise haircuts when stress emerges. That forces the dealer to find replacement funding or sell assets quickly, which makes short-term secured funding fragile.

  1. ALenders can refuse to roll the repo or sharply raise haircuts at each daily maturityCorrect
  2. BRepo interest rates are fixed for the life of the underlying bonds
  3. CThe collateral is legally owned by the dealer throughout the term
  4. DThe haircut is set at inception and cannot change

Explanation

Overnight repo must be refinanced daily, so lenders can simply decline to roll or demand higher haircuts when collateral values or dealer credit worsen. This creates a run dynamic. Fixed rates and unchangeable haircuts are not features of overnight repo, and the lender, not the dealer, takes title to collateral.

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