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FRM Part II · FRM Exam Part II · Liquidity and Leverage

A dealer wants to reduce the risk that its repo funding disappears in a stress. Which action most directly lowers this margin and haircut risk?

Terming out repo funding and using high-quality collateral with stable, low haircuts best reduces the risk. Longer terms fix haircut conditions and avoid frequent rollover, while liquid collateral sees smaller haircut increases in stress.

  1. ATerm out repo funding and use collateral with stable, low haircutsCorrect
  2. BShift funding to overnight repo with the cheapest rate
  3. CConcentrate funding with one counterparty to simplify margining
  4. DPledge the least liquid assets first to preserve liquid ones

Explanation

Longer-term repo locks in haircut terms and avoids rollover and repricing risk, and high-quality collateral has smaller haircut increases in stress. Overnight funding, concentration and pledging illiquid assets all raise vulnerability to margin calls and funding withdrawal.

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