Repo Collateral and Margin: How Haircuts and Marks Protect Bond Proceeds

Collateral and margin in a bond-proceeds repurchase agreement are handled through three linked mechanics: the provider delivers securities worth more than the cash it takes in, the collateral is revalued on a schedule the agreement or the statute sets, and a shortfall is closed on the deadline the statute or the agreement sets.

The Federal Reserve Bank of New York's Economic Policy Review describes a repo as the sale of a security combined with an agreement to repurchase it on a specified future date at a prearranged price, a structure that economically resembles a collateralized loan, and it defines the haircut as the amount by which collateral value exceeds the cash.

The SEC has listed repurchase agreements, alongside guaranteed investment contracts and forward purchase agreements, among municipal reinvestment products typically tailored to meet municipalities' specific collateral and spend-down needs.

A repo is economically a collateralized loan, so this page takes its collateral terms in order for bond proceeds; the repo product itself is covered at full-flex repo, and the wider product set is on the investments hub.

What collateral is eligible for a bond-proceeds repo?

The statutes summarized here govern public-fund repos on each state's own terms and conditions.

Texas authorizes fully collateralized repos that have a defined termination date, are secured by cash and U.S. or agency obligations or other obligations the statute lists, are pledged and held in the entity's name with the entity or an approved third party, and are placed through a primary government securities dealer or a financial institution doing business in Texas, under Government Code §2256.011(a)(1) through (4).

Texas repos may also clear through a covered clearing agency, as §2256.011(a-1) provides by reference to the clearing-agency standards in 17 CFR 240.17Ad-22.

New Jersey limits the underlying securities for local-unit repos to U.S. obligations, 397-day agency obligations, or New Jersey local obligations of 397 days or less, bought through a public depository as defined in the Governmental Unit Deposit Protection Act, with custody of the collateral transferred to a third party and a master repurchase agreement signed, under 40A:5-15.1(a)(8).

Illinois agencies may invest in repos of government securities as the federal Government Securities Act of 1986 defines them, and repos outside that category must meet the conditions in 30 ILCS 235/2(h), which include purchase through Illinois-authorized banks or trust companies, use of a custodial bank, and a master repurchase agreement setting out the basic responsibilities and liabilities of buyer and seller.

Colorado's repo provision covers repos on U.S. Treasury or agency securities and allows the collateral securities themselves to mature in more than five years, under C.R.S. §24-75-601.1(1)(j).

Ohio subdivisions may enter written repurchase agreements with eligible institutions or dealers, and dealer repos in Ohio settle delivery versus payment, under ORC §135.14(E).

Treasury collateral is also the base for SOFR: the Federal Reserve Bank of New York defines it as a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.

From the fund side, the federal money market fund rule defines a government money market fund as one that invests 99.5 percent or more of its total assets in cash, government securities, and/or repurchase agreements that are collateralized fully, under Rule 2a-7 (17 CFR 270.2a-7(a)(14)).

Where eligible collateral sits is a custody question: Ohio requires securities acquired under a repo to go to a qualified trustee (§135.14(K)), and bilateral repos are typically settled delivery versus payment.

The MSRB glossary describes a trustee as a financial institution with trust powers that acts as a fiduciary for bondholders under the bond contract, and notes that a trustee often also serves as custodian, paying agent, registrar or transfer agent.

Custody has a defined place in the arbitrage rules as well: Treasury Regulation §1.148-5(e)(2)(i) counts as qualified administrative costs only reasonable, direct administrative costs, other than carrying costs, such as separately stated brokerage or selling commissions, and excludes legal and accounting fees, recordkeeping, custody and similar costs.

How a particular repo's costs are treated in the yield computation is a determination for tax counsel.

How much margin does a bond-proceeds repo require?

The statutory margin floors differ by state: California requires the underlying securities to be valued at 102 percent or more of the funds, Ohio requires a written repo's market value to exceed principal by at least 2 percent, Colorado requires repos on Treasury or agency securities to be collateralized at no less than 102 percent, and the Texas statute sets no percentage above 100 percent.

The haircut is measured where the trade starts: Federal Reserve research staff illustrate it with a $95 loan against $100 of collateral, which is a 5 percent haircut.

The Texas requirement is a market-value test rather than a percentage: §2256.011(b)(2) requires the underlying obligations to have a market value, when the funds are disbursed, of not less than the principal amount disbursed.

The Government Finance Officers Association said in a 1986 statement that over-collateralization, commonly called haircuts, or marking-to-market practices should be mandatory procedures, and it recommended master repurchase agreements.

The statutory terms routed through this page line up as follows.

Term limits differ just as much: Ohio's §135.14(E) and New Jersey's 40A:5-15.1(a)(8)(c) cap repo maturities at 30 days, California's §53601(j) at one year, and Colorado's §24-75-601.1(1)(j) at five years unless the governing body authorizes longer.

These are the general public-fund statutes: California's §53601(j) limits apply to repos made under that section, while trustee-held bond funds under §53601(m) may follow the indenture instead, and which authority governs a particular fund is a question for bond counsel.

How a shortfall of that size gets surfaced, and how fast it must be closed, are the subjects of the next two sections.

How often is repo collateral marked to market?

The statutory marking floors on this page run from daily in Ohio to at least weekly in Colorado to at-least-quarterly revaluation in California, and the collateral management services Federal Reserve researchers describe for the tri-party market include daily revaluation.

Ohio requires collateral under a written repo to be marked to market daily, and Colorado requires repos on Treasury or agency securities to be marked to market no less frequently than weekly, under ORC §135.14(E) and C.R.S. §24-75-601.1(1)(j).

California requires the underlying securities to be adjusted at least quarterly, with any shortfall against the 102 percent level restored by the next business day, under §53601(j)(2).

In the tri-party market, a 2012 Federal Reserve research article describes clearing banks that settle the trade and provide collateral management services such as daily revaluation of assets, daily remargining of collateral, and allocation of the borrower's collateral to its lenders.

A mark that runs less often than prices move can leave a shortfall unseen between valuations.

A revaluation schedule is a non-rate term, and the written bid specifications for a bona fide solicitation must include all material terms, any term that may affect yield or cost, under Treasury Regulation §1.148-5(d)(6)(iii), so those terms are weighed alongside rate in evaluating bids.

What happens when repo collateral falls short?

Of the statutory paragraphs cited on this page, only California's sets a definite cure deadline: under §53601(j)(2), a shortfall must be restored by the next business day.

California's §53601(j)(2) pairs that next-business-day restoration with its at-least-quarterly adjustment, while Ohio's daily mark under §135.14(E) shrinks the window in which a shortfall can go unnoticed even though the subsection states no cure deadline.

For terms the statutes leave open, the 1986 GFOA statement recommends master repurchase agreements and says governments using the PSA prototype agreement should add provisions on delivery, substitution, margin maintenance, margin amounts, seller representations and governing law.

Florida writes the document requirement into law: a local government's investment policy must require all approved institutions and dealers transacting repurchase agreements to execute and perform as stated in the Master Repurchase Agreement, under Fla. Stat. §218.415(11).

Illinois's 30 ILCS 235/2(h) requires a master repurchase agreement setting out the basic responsibilities and liabilities of buyer and seller, and New Jersey's 40A:5-15.1(a)(8) requires a signed master repurchase agreement as one of its repo conditions.

Transaction records back the mechanics: Ohio requires each repurchase agreement confirmation to state par value, type, rate, maturity and a CUSIP-style identifier, under §135.14(E).

Collateral posting also appears on the provider's side of the credit ledger: Ambac reported in its 2008 Form 10-K that its downgrades triggered cure provisions in nearly all of its investment agreements, that most triggers were based on the lower of the Moody's or S&P rating, and that Moody's November 5, 2008 downgrade of Ambac Assurance resulted in a significant amount of collateral being posted by its investment agreement and derivatives businesses.

Most of the agreements it described offered several remedies, including collateral posting, termination of the contract, or the designation of a replacement guarantor.

That filing describes one provider's contracts in one year, not market-standard terms, and how provider downgrades are handled more broadly is the subject of the GIC credit protection page.

The collateral, marking and cure terms are non-rate terms, and where they may affect yield or cost the bid specifications must state them: a bona fide solicitation requires written bid specifications that include all material terms, any term that may affect yield or cost, and only commercially reasonable terms, under Treasury Regulation §1.148-5(d)(6)(iii).

An issuer that wants the package bid competitively can have mGIC bid it as Bidding Agent.

For a repo already in the portfolio, an independent read of whether its margin level, marking frequency and cure terms still line up with the governing statute is part of a no-obligation reinvestment review.

Which authority governs a particular bond fund, and how an agreement must read under it, are determinations for bond counsel.

Last updated 2026-10-06.

This page is general educational information about municipal finance and federal and state rules as of the date shown. It is not legal, tax or investment advice, and it is not a recommendation about any particular investment. Product availability, legality and suitability depend on the issuer, jurisdiction, governing documents and transaction-specific facts. Final legal and tax determinations remain with the issuer's bond counsel, tax counsel and other advisors.