Unpacking repo haircuts and their implications for leverage

Key takeaways 

• Haircuts vary with repo trading motives, notably whether market participants primarily seek to raise cash or gain access to a specific security.
• Haircuts tend to increase with repo maturity and are lower for less volatile collateral assets. Benchmark sovereign bonds are often associated with subdued haircuts.
• Zero-haircut borrowing is common in hedge fund repo activity, with the largest hedge funds benefiting from the lowest haircuts, enabling very high levels of leverage.

The views expressed in this publication are those of the authors and not necessarily those of the BIS.