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

Regulators propose mandatory minimum haircuts on securities financing transactions with non-bank counterparties. What is the primary financial stability objective?

The main objective is to limit procyclical leverage and reduce fire-sale amplification. Floors on haircuts stop leverage from expanding excessively when markets are calm, so haircuts need not jump sharply in stress, which lessens forced asset sales and funding runs.

  1. ALimit procyclical leverage build-up and reduce the amplification of fire sales in stressCorrect
  2. BEliminate all collateral reuse in the financial system
  3. CGuarantee that repo rates always equal the policy rate
  4. DRemove the need for banks to hold liquid assets

Explanation

Minimum haircuts restrict how much leverage can be obtained against collateral in good times, dampening procyclical haircut spikes and forced sales. They do not ban reuse, fix repo rates, or substitute for liquidity buffers.

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