Magnifying the Risk of Fire Sales in the Tri-Party Repo Market

RePEc Short ID: pco241
ORCID iD: 0000-0001-6906-6241

Alkan, Leyla; Chakrian, Vic; Copeland, Adam; Davis, Isaac; Martin, Antoine

Discussion Paper

Magnifying the Risk of Fire Sales in the Tri-Party Repo Market

Abstract: The fragility inherent in the tri-party repo market came to light during the 2008-09 financial crisis. One of the main vulnerabilities is the risk of fire sales, which can be enhanced by the response of some investors to stress events. Money market mutual funds (MMFs) and the agents investing cash collateral obtained from securities lending (SLs) are thought to behave, in times of stress, in ways that exacerbate fire-sale risks in the tri-party repo market. Based on detailed investor data, we find that MMFs and SLs constitute almost half of the investor market, making it crucial for tri-party repo participants and regulators to account for MMF and SL investment behavior when considering how to mitigate the risk of fire sales.

Keywords: systemic risk; tri-party repos; fire sales;

JEL Classification: G2;G1;