ICMA ERCC publishes white paper: Demystifying Repo Haircuts
18 September 2025 The application of haircuts in repo transactions has recently garnered fresh attention as part of the broader focus on non-bank financial intermediation and related risks, with some questioning prevailing haircut practices, not least the observation of zero and so-called “negative haircuts”. This short paper intends to help inform the related policy debate by seeking to demystify repo haircuts and addressing some misconceptions.
The paper explains the purpose of haircuts, which is often misunderstood, and why in some instances so-called negative haircuts can be entirely warranted. It also discusses the use of aggregate margining, as an efficient alternative to applying haircuts at the individual transaction level, as well as outlining the natural incentives for applying haircuts where it makes commercial sense. Finally, it lays out the implications of a deeper understanding of haircuts for policy makers, particularly from the perspective of managing leverage. It suggests that just as haircut data do not tell us very much about systemic leverage or potential risks to financial stability, the conclusion may be that nor are haircuts an effective policy tool for managing such risks.
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