FRM Part II · FRM Exam Part II · Repurchase Agreements and Financing
A treasurer wants to reduce the fire-sale and run risk associated with the bank's reliance on short-term repo. Which action best addresses this while maintaining the funding of the same assets?
Lengthening repo tenors, diversifying counterparties and using stable haircut terms, with funding tenor matched to asset liquidity, best reduces run and fire-sale risk. Overnight rolling and lender concentration increase rollover dependence, and illiquid collateral invites higher haircuts and withdrawal.
- ALengthen repo tenors, diversify counterparties and set haircut floors, with term funding matched to asset liquidityCorrect
- BShift all repos to overnight tenors to maximise flexibility
- CConcentrate funding with the single largest lender to simplify relationships
- DSwitch collateral to the least liquid assets to retain liquid securities unencumbered
Explanation
Term funding, diversified lenders and stable haircuts reduce rollover and procyclicality risk. Overnight tenors and concentration raise rollover and counterparty dependence. Pledging only illiquid assets increases haircuts and lender flight risk, and does not fit sound liquidity management.
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