most common and popular form of secured lending securities or money - a repo transaction.What is it try to understand from the outset.Repurchase Agreement (REPO, repo) is an agreement borrowing of securities, which acts as guarantor for the funds.The situation could be reversed when the borrowed funds are the guarantor of the securities.Repurchase agreements are often called the agreement to repurchase the securities.The agreement defines the obligations for each opposing party: it is buying and selling.
There are two formats repos: forward and reverse.Direct agreement defines the sale of securities by one party to the other side.Parallel is agreed that the first party to repurchase its securities in a timely manner and at a pre-agreed price.Repurchase will be carried out at a cost much higher primary.Extension between the sale price and the purchase price reflects a yield securities package of this operation.It is expressed as a percentage per annum, and is called the repo rate.The main objective of the implementation of direct agreements is to attract financial resources.
Reverse repo involves the acquisition of documents and commitment of its sale back.The main purpose of the agreement is in the temporal distribution of free financial resources.
the economic substance of transactions
against other manipulation of the securities repurchase transaction remains in demand.What is that from an economic point of view, it is quite obvious.One side gets underway partnerships are necessary for its financial resources, the second is the lack of a fully eliminates the securities.Plus, the other side gets the interest on the temporary use of its tangible assets.Transactions for the most part carried out with government securities and are confined to the category of short-term agreements.The agreement governs the partnership lasting from several days to several months.In world practice, most are subsistence treaty.Between sellers and buyers through an intermediary to enter into transactions with securities.As a third person in most situations serves banking institution, whose responsibilities spelled out in detail in the contract.The situation calls for opening of accounts for securities and cash in the bank intermediary.The agreement, which involved three parties, is less risky.
repurchase and lending
If you look at the repo generally, it can be called a modification of loans secured by valuable property.The only difference is that the transfer of securities and receipt of funds on hand are carried out at the same time.Immediate transfer of ownership from one participant to another contract - this is another feature that has a repo transaction.What it is, even more detailed try to understand the stages of partnership.
repo involves two steps:
- Primary purchase or sale of securities.
- Contact buy or sell securities.
specifics of implementing the steps agreed
difference in time between the implementation of the first and second part of the agreement called for a term repo.The time between manipulations generally measured in calendar days.Counting begins the day after the performance by the parties of their obligations and ends on the day of implementation of the second part of the arrangement.Each of the parties resides in a buyer and as a seller.Quite often, the original purchaser of the securities referred to the creditor, and the original seller - the borrower.Investment transactions in securities for the first seller in a format repo buyer sees manipulation in the form of reverse repurchase agreements.Securities that are the subject of the agreement, referred to as either the underlying asset or security.Repos, which are associated with the provision of credit, provides securities are valued at the repo rate.
risk - is a necessary component without which no repo transaction.What is it and what the risks are typical for an agreement?Let us examine the order.The main hazards associated with the fact that the second stage arrangement can not be made.It is highly probable that at the time of repurchase from the seller will not be on the hands of those same securities and the purchaser will be no money.Help for such situations may be bankruptcy and the arrest of accounts.As an option: as a result of changes in the market situation of the parties may simply refuse to fulfill their obligations in pursuit of self-interest.
Risk Reduction Repo
To reduce the risk of default of one of the parties to the purchase and sale of securities must be accompanied by the following points:
- Discounting software.
- obligations overestimate.
- over a sufficiently important to ensure the systematic monitoring exercise.
- Adding margin (compensation) payments.
discount to repo transactions is a value that characterizes the market price of the security in accordance with the size of existing commitments to a certain point in time and over the life of the partnership.
Perov of the repurchase is estimated based on the initial value of the discount is determined by agreement between the parties in the transaction.It is worth paying attention to the following:
- A higher discount rate provides a good advantage for the buyer, who gets his hands on the software at a lower cost.
- lower primary discount, the greater the benefits of being a seller who offers security on a higher cost.
can be concluded that the primary discount shows acceptable for each party relationship repurchase price and ensure the value of the obligations under the first part of the agreement.
Change in the value of collateral for repurchase
Prior to the implementation of the first part of the repurchase value of the liability, in most cases remains unchanged.Only providing a variable subject, and even then only slightly, due to the time delay of execution of the contract in 1-3 days.At the same time in the repo operations with a term of 3 months or more as the price commitments and software can vary significantly.The development of events will imprint such factors:
- dynamics of the market value.
- revenue growth repurchase transaction.
- change in discount compared to its initial value, which will cause one of the parties to bear substantial losses.
situation can eliminate the chance of compensation mechanism for contributions.It is activated by the conclusion of an agreement on the limit values of the discount: maximum and minimum.During the entire term of the repo within the MICEX trading system is a daily revaluation of liabilities and security prices, controlled by the level of its adequacy.
If the value of the collateral is low, and a preliminary assessment of its overpriced, one of the parties to eliminate the loss of the second party, forced to make a compensatory payment.It can be expressed as securities, and the monetary amount.In this situation, the repo contract slightly modified.The obligations of a party of the second part of the transaction reduced.If you need to make a compensation payment side ignores their obligations, there is a need for early implementation of the second part of the contract.Compensatory payments allows you to maintain a balance between the obligations and.He can become the initiator of early performance of obligations under the contract.
active operations of the bank under the scheme repo the bond market began to practice for the first time in 2003, after the adoption of relevant legislation.In times of economic crisis, which bloomed in all its glory in 2008, the value of the two transactions - forward and reverse repurchase agreements - has changed.They began to have a higher weight as the dominant instrument for ensuring the liquidity of the banking system crumbling.It is worth noting that in certain time intervals the main, and sometimes the only provider of liquidity, since 2008, it appears the Central Bank of the Russian Federation.This fact is well confirmed by the fact that the outcome of repo auctions in 2008 and 2009 clearly pointed to the Central Bank as a supplier of liquidity.
role of CBR repo transactions
Financial institutions are actively using the active operations of the bank repurchase agreements to maintain the very liquidity.This is evidenced by the fact that most of the agreements is no more than a day.Operations lasting from 3 to 7 days at a rate of% per annum 9,22-12,4 extremely rare.In the face of a buyer of bonds on the first part of the agreement and the seller of the second almost always favor the CBR.That bank and determines the number of participants for transactions after a preliminary review of applications.
role in providing basic or bond issues may make themselves bonds belonging to the category of securities, any other securities which are included in the Lombard list of the Bank of Russia.The advantage of the agreements can be called, and what is typical for their individual tax treatment.This makes the manipulation of almost the most effective mechanism for lending.