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Repo Transactions

Introduction

Repurchase agreements (Repos) are collateralised lending transactions. One party agrees to sell securities (e.g. gilts) to the other against a transfer of funds. At the same time the parties agree to repurchase the same or equivalent securities at a specific price in the future. In some jurisdictions securities lending transactions are the mechanism by which an almost identical economic result to Repo is achieved.
         
Repos are often structured to secure cash loans, where the buyer obtains securities as protection against cash borrowers defaulting. Securities houses often use Repo to finance holdings of bonds or equities. The party borrowing the security is commonly referred to as buyer, while the party lending securities is referred to as seller. In Repo transactions normally all of the seller's interest in the purchased securities passes to the buyer, who may freely sell, transfer, pledge or hypothecate it.

A reverse Repo involves buying and subsequently re-selling the securities and is the mirror image of a Repo.

Initial valuation and sale of the securities take place at the current market price including accrued interest. When the Repo transaction is terminated, the securities are re-sold at a pre-agreed price. This price consists of the original sale price i.e. market price and accrued interest, plus a previously determined interest rate (the Repo rate). The difference between the sale and repurchase price equates to a borrowing/lending interest rate for secured money.

The UK open government bond Repo market was established in 1996 with a Master Agreement and changes to tax laws.

Types of Collateral

Most Repo is transacted on a 'general collateral basis' using any securities acceptable to the cash lender. These are usual generically defined in the Repo agreement signed between the counterparties and may include for instance 'any G-7 government bonds' or 'any UK gilts'.

'Special' Repo relates to transactions based on a specific security that may be highly sought after in the market, perhaps because it is the cheapest-to-deliver stock to deliver into a maturing futures contract. Special Repo rates tend to be higher that GC Repo rates.

Master agreements

The most commonly used master agreement for documenting Repo is the PSA/ISMA Global Master Repo Agreement (GMRA). The European Banking Federation has recently released its own master agreement (EMA). This aims to replace various domestically focussed master agreements for Repo and securities lending with a harmonised document that can be used throughout the Euro-zone.

 
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