Minimum haircuts must be carefully designed – BIS bulletin
Funding- and collateral-driven trades incentivise different repo terms, authors point out
Policy-makers need to consider the drivers of sovereign bond repurchase agreements before implementing measures to rein in hedge funds’ leverage in that market, a Bank for International Settlements study has argued.
The latest BIS bulletin, published on December 2, notes that hedge funds’ use of leveraged trading strategies has led regulators to come up with potential responses, such as imposing minimum haircuts on bond repos.
However, the authors – Felix Hermes, Maik Schmeling and Andreas
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