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

A broker-dealer funds a portfolio of Treasury securities through overnight repos with a range of lenders. Its treasurer wants to cut rollover risk without changing the collateral. Which action most directly reduces the risk that funding is withdrawn at short notice?

Lengthening repo tenors and staggering maturities most directly reduces rollover risk, because less funding must be refinanced on any one day. Relying on one lender or more overnight funding raises refinancing and concentration risk, and a lower haircut simply increases leverage rather than securing funding.

  1. ALengthen repo tenors and stagger maturities across the term structureCorrect
  2. BSwitch all borrowing to a single large lender to simplify the relationship
  3. CRaise the proportion of overnight repos, because they carry lower rates
  4. DAccept a lower haircut so less cash is tied up in each trade

Explanation

Rollover risk arises when a large amount of funding matures at once and must be refinanced. Longer tenors and staggered maturities reduce the amount that must be rolled on any given day. A single lender increases concentration risk, and more overnight funding increases rollover risk. A lower haircut means more leverage and is not a rollover mitigant.

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