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

Which feature of a tri-party repo market is most closely associated with the risk of a run on a dealer bank during stress?

Run risk arises because overnight repo must be rolled daily. If cash lenders refuse to roll, the dealer faces an immediate funding gap, and collateral liquidated in fire sales can depress prices, raising haircuts and triggering further withdrawals across the market.

  1. ACash lenders may refuse to roll overnight repos, and collateral must then be liquidated by the clearing bank or lenders in a fire saleCorrect
  2. BHaircuts on repo are fixed contractually for the life of the dealer's balance sheet
  3. CRepo borrowers can extend maturity automatically at the original rate
  4. DCollateral in repo is held by the borrower, so lenders face no collateral liquidation risk

Explanation

Short-term repo must be rolled; if lenders withdraw, the dealer faces a funding gap and collateral sales that can depress prices and feed further runs. Haircuts are not fixed and borrowers cannot force rollovers; collateral is held by the lender or its agent.

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