Zero-Haircut Repo Borrowing Is Common — And Concentrated Among the Largest Hedge Funds
· Regulation · QuoteReporter
BIS Bulletin: Zero-Haircut Repo Borrowing Is Common — And Concentrated Among the Largest Hedge Funds
A new BIS Bulletin released today (No 117) delivers one of the clearest pictures yet of how repo haircuts really work in practice — and why simple averages can be dangerously misleading.
Using the ultra-granular euro-area Securities Financing Transactions Data Store (SFTDS), authors Felix Hermes, Maik Schmeling, and Andreas Schrimpf show that **zero-haircut and even negative-haircut repo transactions are the norm rather than the exception**, especially for the biggest hedge funds.
The implications for leverage — and therefore systemic risk — are profound.
### Key Takeaways from the Report
| Key Finding | What It Really Means |
|---|---|
| Haircuts depend on trading motive | Funding-driven repos → higher haircuts Collateral-driven “specials” → frequently zero or negative haircuts |
| Zero-haircut borrowing dominates hedge funds | Even after excluding portfolio-netted trades, most hedge fund cash borrowing happens at 0% haircut |
| Largest hedge funds get the best terms | Top-10 funds by volume consistently borrow at near-zero haircuts; smaller peers pay more |
| Benchmark bonds get special treatment | Euro-area 10-year sovereigns trade with noticeably lower haircuts than surrounding maturities |
### Why Trading Motive Is Everything
The single most important insight: **you cannot interpret a repo haircut without knowing why the trade is happening**.
The authors classify repos into three categories:
| Repo Type | Primary Motive | Typical Haircut | Who Benefits from Low Haircut? |
|---|---|---|---|
| General Collateral (GC) | Cash borrower needs funding | Highest (cash lender imposes discipline) | Cash lender (lower risk) |
| Specific Collateral (SC) | Mix of funding + collateral sourcing | Medium | Both parties |
| Specials (SPC) | Cash lender desperately wants the specific bond | Zero or negative | Collateral lender (bond owner) |
Result: **In euro-denominated repos, specials now dominate volume** — a legacy of QE-induced collateral scarcity that has only partially reversed with QT.
In USD repos involving European banks, GC trades are larger, but specials remain substantial.
### Hedge Funds: Zero Haircuts = Theoretically Unlimited Leverage
The most striking findings concern hedge fund bilateral repo borrowing:
| Metric | Result | Implication |
|---|---|---|
| Share of zero-haircut transactions (after stripping netted trades) | 50–70% in both EUR and USD | Hedge funds routinely borrow cash with no haircut buffer |
| Average haircut for top-10 hedge funds vs. others | Top-10: ~0% Others: materially higher |
Market power and dealer relationships = cheaper funding |
| Theoretical maximum leverage from repo leg alone | Unlimited at 0% haircut | Only portfolio margining, VaR limits, or dealer discretion caps leverage |
Translation: the biggest relative-value fixed-income hedge funds — the same players behind the Treasury cash-futures basis trade — can achieve **effectively unlimited gross leverage** through the repo market.
A 0.5% haircut already allows 200× leverage. A 0% haircut removes any hard mathematical limit from the repo leg alone.
### Policy Implications: Minimum Haircuts Are Tricky
The authors explicitly caution against blunt-instrument solutions:
| Proposed Fix | Unintended Consequence |
|---|---|
| Uniform minimum haircut floors | Hurts collateral lenders (bond owners) who rely on negative haircuts to lend scarce bonds profitably |
| One-size-fits-all rules | Disrupts efficient functioning of the “specials” market that finances government debt |
Any regulatory intervention would need to be **motive-aware** and **segment-specific** — a tall order.
### Bottom Line
The repo market is not broken — it is functioning exactly as intended for two very different purposes:
1. **Cheap, safe funding** (GC → higher haircuts)
2. **Efficient collateral transformation** (specials → zero/negative haircuts)
The problem arises when the second purpose is used at massive scale by highly leveraged, systemically important hedge funds.
As the authors conclude:
> “Larger hedge funds in particular have access to very low haircut funding and, consequently, high attainable leverage.”
In a world where the Treasury basis trade has repeatedly been fingered as a source of fragility (March 2020, September 2019, and again in 2022–23 rate volatility episodes), today’s BIS Bulletin is a timely reminder: **leverage never really went away — it just moved deeper into the plumbing**.
*Source: BIS Bulletin No 117, “Unpacking repo haircuts and their implications for leverage”, Hermes, Schmeling and Schrimpf, 2 December 2025.*
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