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example, a dealer enters into an overnight repo with Customer A, the next day the collateral is transferred back to the dealer. The dealer can then enter into a repo with Customer B for, say, five days without having to redeliver the collateral. The clearing bank simply establishes a custo- dian account for Customer B and holds the collateral in that account. In this type of repo transaction, the clearing bank is an agent to both parties. This specialized type of repo arrangement is called a tri-party repo. For some regulated financial institutions (e.g., federally chartered credit unions), this is the only type of repo arrangement permitted. Paragraph 8 (“Segregation of Purchased Securities”) of the Master Repurchase Agreement contains the language pertaining to the possession of collateral. This paragraph also contains special disclosure provisions when the “Seller” retains custody of the collateral. Paragraph 11 (“Events of Default”) details the events that will trig- ger a default of one of the counterparties and the options available to the non-defaulting party. If the borrower files for bankruptcy, the U.S. bankruptcy code affords the lender of funds in a qualified repo transac- tion a special status. It does so by exempting certain types of repos from the stay provisions of the bankruptcy law. This means that the lender of funds can immediately liquidate the collateral to obtain cash. Paragraph 19 (“Intent”) of the Master Repurchase Agreement is included for this purpose. DETERMINANTS OF THE REPO RATE Just as there is no single interest rate, there is not one repo rate. The repo rate varies from transaction to transaction depending on a number of factors: quality of the collateral, term of the repo, delivery requirement, availability of the collateral, and the prevailing federal funds rate. Panel A of Exhibit 8.3 presents a Bloomberg screen (MMR) that contains repo and reverse repo rates for maturities of 1 day, 1 week, 2 weeks, 3 weeks, 1 month, 2 months, and 3 months using U.S. Treasuries as collateral on November 15, 2001. Panel B presents repo and reverse repo rates with agency securities as collateral. Note how the rates differ by maturity and type of collateral. For example, the repo rates are higher when agency securities are used as collateral versus governments. Moreover, the rates generally decrease with maturity that mirrors the inverted Treasury yield curve on that date. Another pattern evident in these data is that repo rates are lower than the reverse repo rates when matched by collateral type and maturity. These repo (reverse repo) rates can viewed as the rates the dealer will bor- row (lend) funds. Alternatively, repo (reverse repo) rates are prices at which dealers are willing to buy (sell) collateral. While a dealer firm pri-
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