Talk:Repurchase agreement/Archives/2012

Abbreviation?

Why is the abbreviation for repurchase agreement repo?

Legal distinction

What are the legal statuses regarding entitlement (legel owner, coupon & dividend payments) during a repo?

The seller of the bond retains the right to the coupon (or dividend) during the life of the Repo. The coupon will be paid to the whoever owns the bond during the Repo but this must be paid on to the seller.

Correct on the above. Operationally, the owner of the bond during the Repo period "manufactures" a similar payment to the Repo seller. This is true in classic repo transactions. As repo transactions are true sale/repurchase transactions, legal title transfer is effected at the start leg of the transaction, and at the maturing leg. — BernardChin 12:43, 6 October 2006 (UTC)

Investing in repos

Why is it so damn hard to find someone that knows about them and with whom you can invest in repos? You'd think private banking and ivestment baning reps would know about a USD 5 trill. market. --Kimonandreou 18:28, 12 January 2006 (UTC)

Repos are generally about lending or borrowing large amounts of money i.e. not something for the private investors. Even if acting as an intermediary and making profits on the spread between reversing and repoing the spreads are tight so you need a lot of capital to start with, not to mention settlement facilities etc.

If you happen to hold very large quantities of high quality bonds and want to raise cash more cheaply than unsecured lending, I'm sure you can find an investment bank that would be interested in talking to you.

Practically, it is a question of scale and efficiency when trade amounts are small. Retail repos exist in countries such as Taiwan and Korea. You would naturally expect retail repo rates to be wider (bid/ask) then institutional levels. (Practitioner) — BernardChin 12:29, 6 October 2006 (UTC)

Using Convertible Bonds as underlying security in Repos

What are the key issues to consider when structuring a Repo using convertible bonds as the underlying security?

• Depends. usually you'd want to avoid using convertibles for GC (general collateral) repos -- trades in which the underlying securties don't matter so long as they are of a certain (investment) quality. If a convertible bond comes up as a special (ie, someone, either yourself or the street wants it), arrangements will be made, but usually special precautions have to be taken. The same is true of pretty much every type of nonstandard bonds. RobLinwood 02:45, 9 May 2006 (UTC)

These days, repo markets have advanced and collateral types include convertible bonds, asset-backed securities, structured-notes, regular liquid government bonds, and equities. You just have to address the increased risks given the liquidity of the collateral. — BernardChin 12:32, 6 October 2006 (UTC)

Typo?

What does this sentence mean?

Securities Lending While general motivation of Repo is the borrowing or lending of cash, is securities lending the motivation is to temporarily obtain the security for other purposes, such as covering short positions or for use in complex financial structure. Securities are generally lent out for a fee. Securities lending trades are governed by different types of legal agreements to Repos.

Economically, Repos or SecuritiesLending can accomplish purposes as funding or securities-covering. Legally, the transactions are similar with title transfers. However, they are legally governed by different master agreements. — BernardChin 12:40, 6 October 2006 (UTC)

Whether repo is a transaction of capital market

Is repo a transaction of capital market? Or is it only a transaction of money market?

Don't look for an absolute "truth" on this one. Since a repo is esentially a short term loan it fits the usual definition of "money market." But since it formaly involves buying and selling long-term bonds, at least in a purely formal sense, it is a capital market transaction. I'll say "money market" is most accurate. Smallbones 10:02, 11 July 2006 (UTC)

Arguably both. Textbook authors usually focus on capital *or* money market. Repos straddle both markets. Those who argue for money market tend to be cash-focused. Those who argue for capital market tend to be security-focused. — BernardChin 12:35, 6 October 2006 (UTC)

Maturity of Repos

Is there any particular advantage in trading repos with a short maturity e.g. overnight compared to say 6 months? What market conditions would a longer contract benefit over a shorter one?Euanbeer 09:33, 22 September 2006 (UTC)

Depends what risk/return you want. Longer term repos lock you into term interest rate risk, versus say overnight interest rate risk. Operationally, if you do overnight repos, you have to do them (roll them) again the next day, and this can get tedious. Consequently, the market also has a OPEN repo, in addition to overnight and term repos. — BernardChin 12:39, 6 October 2006 (UTC)

Repo rate vs Treasury and Fed Funds rate

Is it true that the repo rate is higher than the treasury yield, but lower than fed funds rate? Is this true in general, or does this apply only to the US? Finnancier (talk) 12:11, 16 December 2007 (UTC)

open repo???

Are open repos really traded or is it only a theoretical concept? If they are reallly traded, how does it work exactly? Who decides when the repo should end (the borrower or the lender)? Is the repurchase price agreed upon beforehand? Does the borrower make regular interest payments during the loan period?

yes, they are booked in high volume. They are typically re-rated daily to account for market movement and so have far smaller interest rate risk exposure. Eventually the trade is 'closed' out at which point closing cash is calculated using the series of rates applied throuout the trade.

—Preceding unsigned comment added by 99.231.76.148 (talk) 02:21, 22 November 2008 (UTC)

Margin on buy/sell back trades

I updated text, previously it stated buy/sell backs are not marked to market and tracked for margin. This isn't strictly correct, they are typically tracked along with repo. They do have slightly increased risk to to the lessened legal standing in the absence of a legal agreement. If the liquidators come in, they will retrieve lost collateral for trades covered by agreements first.

Merger proposal

I propose that Repo_105 be merged into Repurchase agreement. The content in the Repo 105 article can easily be explained in the context of repurchase agreement. From there, may be add a paragraph on accounting scandals using these agreements. Drybittermelon (talk) 06:15, 8 December 2010 (UTC)

• Oppose because this was a significant feature of the downfall of Lehmans. This is already the focus of the article, so instead consider rename to Use of Repo 105 by Lehman Brothers. There is sufficient material available for a separate article. - Fayenatic (talk) 12:15, 22 December 2010 (UTC)
• Oppose, but instead, merge it to Bankruptcy of Lehman Brothers, where it would fit in perfectly both in scope and topic. Owen× ☎ 17:21, 24 February 2011 (UTC)
• Oppose per editors OwenX and Fayenatic and as this article is already fairly substantial. I removed the merge tag as discussion has been ongoing since 2010 with no support. FeydHuxtable (talk) 09:29, 29 July 2011 (UTC)

MF Global: repurchase agreements back in the news

Can this be added to this article: http://dealbook.nytimes.com/2011/11/03/as-regulators-pressed-changes-corzine-pushed-back-and-won/ ? Ottawahitech (talk) 19:20, 4 November 2011 (UTC)

Sure, I added it to the risk section. Just as a fyi, except for the politicalized articles that touch on tax and stuff like that, most finance articles seem to have very few active editors. So even more than with most articles, there's usually no need to ask in advance before making changes direct to the article. FeydHuxtable (talk) 17:18, 8 November 2011 (UTC)

Thanks for adding the information - I was not familiar enough with the topic to know where it would best fit in. This is what the article said about repurchase agreements: "MF Global financed these purchases through complex transactions known as repurchase agreements. In these, the bonds themselves were used as collateral for a loan to purchase them. The interest paid on that loan was less than the interest the bonds paid out, earning the firm a profit from the spread". So, it seems that MF Global purchased some risky bonds by borrowing the funds to purchase these bonds hoping that they would benefit from the spread between the interest rate they had to pay for the loan and the higher interest rate which they received from the bonds themselves. The question in my mind is who would have lent them this money willingly? Ottawahitech (talk) 01:02, 22 November 2011 (UTC)

The lender would be someone who thinks that the interest rate that MF Global is willing to pay is better than they can get elsewhere, for that maturity (length of loan) and risk. The risk, of course, is that (a) the bonds will fall in value and (b) that if they do, MF Global won't be able to make good the difference. [That assumes that the value of the bonds at the time of the loan was equal to what was due at the end of the loan period; if the value of the bonds was just equal to the loan amount, then the transaction is even riskier for the lender.] Risky bonds tend to have a high interest rate, so MF Global could offer a good interest rate to the lender and still - IF the bonds didn't fall in value - make (a lot of) money. The lender, of course, thought that bonds were riskier enough to not want to directly invest in them (and/or thought the bonds might not have enough liquidity to be able be able to be sold easily at the desired point in time where the lender wanted the money available again, the maturity point of the loan to MF Global.

In short, both sides of the transaction were gambling - for MF Global, that the bonds would not drop (significantly) in value; for the lender to MF Global, that MF Global would cover any shortfall resulting from a drop in value. -- John Broughton (♫♫) 20:39, 29 November 2011 (UTC)

What John said is correct. Just to give you a more tangible answer, the main folks lending the money would have been the less clued up fund managers. I don't have the inside track on MFG, but Id guess they likely didn't even know they were actually funding the risky euro trades. Even if they did, they were probably like "Your moneys safe, no way the Fed will let a primary broker go down after what happened with Leham." Not all market players understand that now GS are in a strong position theyre back channeling to prevent meaningful intervention until at least one big banks fails so they can stop in and fill the power vacummn. They even have the ECB locked down with their alumis running it and also advising Germany as the US ambassador. Don't be fooled by the coordinated CB intervention that will be on the news soon. At least one sizeable bank will have to fail before GS allow the current turmoil to be put to bed. FeydHuxtable (talk) 13:44, 30 November 2011 (UTC)

P&L calculation

What does the P&L calculation for a repo look like? Is the collaterial always bought back at the same price it was sold?

For open repos, can either the buy or seller initiate the unwinding of the position? Floyd2012 (talk) 18:44, 27 June 2012 (UTC)

Same price? Only in Japan or Switzerland. In the U.S. you'd still pay about $3.50 per $1 million of overnight repo funds. A zero premium would imply a zero interest rate.

Clarification needed of “single transaction” in Sec. 1

Overall, this is a well-written, informative article that helped me quickly brush up on a few aspects of the repo market that I’d become rusty on.

But in Section 1 (“Structure and terminology”), the last sentence of the 2nd paragraph needs to be explained more fully: “…a key aspect of repos is that they are legally recognised as a single transaction (important in the event of counterparty insolvency) and not as a disposal and a repurchase for tax purposes.”

Most of us readers aren’t specialists in either repos, bankruptcy law, or the tax code, so this sentence is virtually impossible to understand as written. (As an economist, I’m already basically familiar with repos, but I don’t understand that sentence at all.)

• Does the parenthetical comment "(important in the event of counterparty insolvency)” apply to the whole sentence, including “tax purposes,” or does it apply only to the “single transaction” aspect? Its placement in the sentence implies the latter, but I can’t be sure that’s correct.
• Is the “counterparty” the repo seller or buyer? Or does it mean simply “the buyer or the seller”? That’s obviously a crucial distinction, so it shouldn’t be left so ambiguous. (And why introduce a completely new term for either party at this point, anyway? If it’s an important, commonly used alternative term of trade in the repo market, it should be included in the “Introduction,” along with all the other alternative terms. In any event, if the term is to be used, it needs to be explained which party it applies to.)

As I said above, this is a good article. It seems to merit better than “C class” and deserves to be nominated for a higher status (after a thorough review by a WP copyediting specialist, which I’m not qualified to do). --Jackftwist (talk) 18:38, 2 October 2012 (UTC)