Securities financing and asset markets: new evidence

Using survey data on secured funding arrangements provided by broker-dealers for their clients-a class of contracts that includes bilateral repo-we document that financing rates, collateral haircuts, lending maturities, and position limits move strongly together over time and across asset classes. Liquidity of the underlying securities, as opposed to their volatility or credit risk, is the main driver of this behavior, with dealer balance-sheet constraints also playing a role in the funding of less-liquid security types. A simple model of dealer-client interaction rationalizes these findings. Instrumenting with changes in market conventions, we find that funding conditions had little effect on cash securities markets between 2011 and 2019, but the tightening of terms during the market stress of early 2020 likely impaired liquidity and reduced asset returns to some degree.