There is a one-day interest rate risk that may impact credit risk if interest rates suddenly rise so that the market value of the collateral backing the repo falls. To avoid the risk many repo transactions require a securities “haircut” to be imposed at the time of the transaction–

more securities are used to back the cash part of the transaction. For example, Bank A may send $100 million in cash to Bank B. In turn, Bank B sends $105 million in securities as collateral to back the cash loan from Bank A? LO.1