On December 16 2015, Peking University HSBC Business School invited Professor Jun Kyung Auh who is an Assistant Professor of Finance at the McDonough School of Business at the Georgetown University. The seminar was entitled "The Role of Margin and Spread in Secured Lending: Evidence from the Bilateral Repo Market". Professor Auh received his Ph.D. in Finance and Economics and M.A. in Mathematics from the Columbia University in New York, and presented at international conferences in the US, Australia and the UK. His research interest focuses on corporate credit risk, debt structure, bankruptcy risk, credit ratings and derivatives.
In his presentation Professor Auh explained that he and his colleagues examined secured lending contracts that use a novel, loan-by-loan database of all bilateral repurchase agreements (repos) that finance a hedge fund’s speculative positions over three years. A repo has two main contract terms: loan price (spread) and excess collateral (margin). By observing multiple loans originated on the same day by the same lender on different collateral, the professor showed that margins and spreads increase together, with the lender retaining more risk as collateral quality declines. He compared contemporaneous contracts on identical collateral by different lenders, estimating that one point of spread substitutes for nine points of margin. The borrower trades off higher spread for lower margin when facing (i) less creditworthy lenders, and (ii) lenders with greater access to wholesale funding. As borrower default risk increases, margins (but not spreads) rise faster when the collateral value is more opaque. This suggests that margin has a unique role in protecting the lender from collateral illiquidity.
Reported by Fayeza Yahya
