Repo

REPURCHASE AGREEMENTS

PRESENTED BY

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RABIA RIAZ (BT-04-28) MARIAM ALI (BT-04-36) AMNA AHMED (BT-04-04)

What are REPURCHASE Agreements?? A repurchase agreement (RPs or repos) is a sale of securities coupled with an agreement to repurchase the same securities at a higher price on a later date. A repo is thus broadly similar to a collateralized loan.

Repurchase agreemants cont. 

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There is a temporary rise in reserves of buyer. Thus, repurchase agreements are used when there is a temporary fall in reserves of seller.

History.. Repo was introduced in 1998 by the Fixed Income Clearing Corporation (FICC) and two large dealer banks, JPMorgan Chase Bank(JPMC) and Bank of New York (BoNY), to reduce transaction costs and enhance liquidity in the repo market. Average daily net settlement volume in General Collateral Finance Repo rose from $11.3 billion in 2000 to $101.3 billion in 2002,

REVERSE REPURCHASE AGREEMENT 

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Reverse repo is simply a repurchase agreement as described from the buyer's viewpoint, not the seller's. Hence, the seller executing the transaction would describe it as a 'repo', while the buyer in the same transaction would describe it a 'reverse repo'. So 'repo' and 'reverse repo' are exactly the same kind of transaction, just described from opposite viewpoints. Reverse repurchase agreements are used when there is a temporary rise in excess reserves.

Collateral 

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Collateral is assets provided to secure an obligation. Traditionally, banks might require corporate borrowers to commit company assets as security for loans. Repo use collaterized agreements for transactions

Collateral 

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Collateral Seller: The party that are selling the securities are collateral seller. (sale/repurchase) Collateral Buyer: The party with the reverse repo (purchase/resale) are collateral buyer.

TYPES OF COLLATERAL Types of collateral used are..     

T bills Cash Government bonds Corporate bonds Shares

Motivations for repos

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For the buyer, a repo is an opportunity to invest cash for a customized period of time

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The seller gets the cash in time of need.

Market for repurchase agreements 

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Many financial and non-financial corporations take both repo and reverse repo positions. A bank, for example, might loan funds to a dealer with an open reverse repo (collateral buyer), while financing part of its shortterm loan portfolio with a term repos (collateral seller).

Market for Repurchase Agreements 

Federal funds are deposits of banks and deposit institutions with the Federal Reserve (Fed) that are used to maintain the bank’s reserve position required to support their deposits.

MARIAM ALI BT-04-36

Types of Repo Maturities There are three types of repo maturities.  Overnight: it refers to one day maturity transaction  Term: It refers to repo with a specified end date. 

Open repo: It has no end date.

Maturity period of repo Most repos have very short terms to maturity i.e. from 1 to 14 days, but now there is a growing market for longer-term that is 1 to 3 months.

Types of Repurchase Agreements     

Due bill/hold in-custody repo Tri party repo Whole loan repo Equity repo Sell/buy backs and buy/sell backs

Due bill/hold in-custody repo In a due bill repo, the collateral pledged by the (cash) borrower is not actually delivered to the cash lender. Rather, it is placed in an internal account ("held in custody") by the borrower, for the lender, throughout the duration of the trade. Because of the risk it is less common.

Tri-party repo In tri-party repo a custodian bank or international clearing organization acts as an intermediary between the two parties to the repo. The tri-party agent is responsible for the administration of the transaction including collateral allocation, marking to market, and substitution of collateral.

Whole loan repo A whole loan repo is a form of repo where the transaction is collateralized by a loan or other form of obligation (e.g. mortgage receivables) rather than a security.

Equity repo The underlying security for most repo transactions is in the form of government or corporate bonds Equity repos are simply repos on equity securities such as common (or ordinary) shares. Some complications can arise because of greater complexity in the tax rules for dividends as opposed to coupons.

Sell/buy backs and buy/sell backs A sell/buy back is the spot sale and a forward repurchase of a security. The basic motivation of sell/buy backs is generally the same as for a classic repo, i.e. attempting to benefit from the lower financing rates generally available for collateralized as opposed to non-secured borrowing

Securities lending 

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The general motivation for repos is the borrowing or lending of cash. In securities lending, the purpose is to temporarily obtain the security for other purposes, such as covering short positions or for use in complex financial structures. Securities are generally lent out for a fee. Securities lending trades are governed by different types of legal agreements than repos.

Taxation 

Tax is also applied to repo but only in the case when the ownership remains with the seller of securities.

Credit Evaluation Before conducting any repo transaction participants conduct credit evaluation and impose a credit limit on their counterparties. A formal credit evaluation involves getting information about the financial capacity of the counterparties.

AMNA AHMED BT-04-04

Marking-to-Market A decline in the market value of the securities sold in repos creates a credit exposure for the repo buyer, as the value of the securities asset is now lower than the cash value. To Solve this problem marking-to-market is practiced to revalue repos using current market prices. The value of all repos are usually marked-tomarket (or re-priced) on a daily basis to reflect changes in market prices and to recalculate exposures.

Margin call Mark-to-market margining allows repo buyers to call for additional cash or securities assets from the seller. Notification and settlement of margin calls should be timely and damages for nonperformance of margin calls should be established in legal agreements.

Risks in repurchase transactions 

Interest Risk 

Increases with 

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Credit Risk 

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the time to maturity of the underlying security the length of the repo contract

A possibility that either party may fail to honor the future transaction

Operational Risk 

If ownership of the repoed security is not transferred on the official registry

Risks 

If the borrower (collateral seller) cannot buy back the underlying securities, the lender is left with securities whose price could or may already have decreased.

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To minimize such risk, a repo agreement may require that the borrower set up an initial margin in the form cash.

Who buys repo

Money funds are the buyers of repo

Repurchase agreements in Pakistan

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Shift its monetary policy target It answers to many needs of state bank and large industries.

Trading process of repurchase agreement 

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Arranged either directly between two parties or with the help of brokers and dealers Example of t-bills The repo buyer arranges to purchase T-bills from the repo seller with an agreement that the seller will repurchase the T-bills within a stated period of time

Master Agreement 

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A master agreement is a legal document that specifies the terms that apply to all transactions between parties, or a defined subset of transactions, including remedies in the event of counterparty default. Global Master Repurchase Agreement (GMRA) is commonly used for repos.

Transaction processing of repurchase agreements Corporate A Investor

Corporate B Borrower

J.P. Morgan

Bank of America

Buys a $75M Repo

Sells a $75M Repo

FRBNY Today: -$75 from R/A of JP Morgan +$75M to T-Bond Account of JP Morgan Day+1: +$75M + Int. to JP Morgan - $75M to T-Bond Account of JP Morgan

Fedwire cash Fedwire T-bill Fedwire cash Fedwire T-bill

FRBNY Today: +$75 from R/A of JP Morgan -$75M to T-Bond Account of JP Morgan Day+1:-$75M + Int. to JP Morgan + $75M to T-Bond Account of JP Morgan

Repurchase agreement yield calculation

Calculating the Yield on a Repurchase Agreement

i RA 

Pf  P0 P0

360 X h

Uses and advantages 

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A position in repurchase agreements enhances a fund's ability to handle day-to-day cash flow needs . In contrast with direct operations, these agreements provide temporary financing of cash shortages and surpluses, but do not directly influence supply and demand in the instrument used as collateral. Improvements in the T-Bills market Less credit risk Reduce transaction cost

QUESTIONS??????