Proportionate margining for repo transactions

The repurchase agreement (repo) market plays a central role in funding and leveraging securities positions, and sourcing securities. Traders in the repo market protect themselves from the default of their counterparties through margin collected via haircuts on repo transactions. Since the purpose of margin is to protect a firm from the default of a counterparty, when set appropriately these margins accurately reflect the risk and costs of counterparty default.1Recent research showing that haircuts on many Treasury repo transactions are low or zero has raised concerns that margining practices in this market are insufficiently strict. These low haircuts are seen as encouraging highly leveraged positions in the Treasury market, which might exacerbate disruptions in the Treasury market such as those experienced in March 2020.