FRM Part II · FRM Exam Part II · The Failure Mechanics of Dealer Banks
A dealer bank's hedge fund prime brokerage clients are worried about its solvency. Which action by the clients most directly drains the dealer's liquidity?
Clients withdrawing free credit balances and moving positions to other prime brokers drains liquidity most directly. Those balances and rehypothecable assets fund the dealer, so their removal creates an immediate funding gap, which can fuel a run on the prime brokerage business.
- AIncreasing the amount of cash they leave as free credit balances at the dealer
- BWithdrawing free credit balances and moving positions to other prime brokersCorrect
- CAgreeing to longer lock-ups on their own fund investors
- DPosting additional margin in the form of cash at the dealer
Explanation
Prime brokerage clients' free credit balances and rehypothecable assets are a source of funding for the dealer. When clients withdraw balances or transfer positions, the dealer loses that funding and the ability to reuse collateral. The other options add or leave liquidity with the dealer.
Did you get it right without looking?
One question tells you little. A timed set on The Failure Mechanics of Dealer Banks shows your real accuracy, how long you take and where you lose marks.
More The Failure Mechanics of Dealer Banks questions
- Why does the failure of a dealer bank tend to be more disorderly than that of a commercial bank resolved through deposit insurance, accordin…
- A dealer bank has a liquidity pool of $20 billion. Under stress, repo lenders apply increased haircuts on $100 billion of securities finance…
- Which policy tool would most directly reduce the risk of a fire sale following a run on a dealer's tri-party repo funding?
- A dealer bank is rumored to be in trouble. Hedge fund clients with prime brokerage accounts begin withdrawing free credit balances and movin…
- Which statement best describes why Lehman Brothers' failure in September 2008 differed from Bear Stearns' failure, as discussed in the deale…
- A dealer bank finances a $200 million bond position in repo with a 5% haircut. During stress the haircut rises to 15%, and the bond price is…