Repos (Buy/Sell Back Transactions)
With a Repo (buy/sell back transactions), you agree on the simultaneous sale of securities and their repurchase at a later date. You can use the Repo Transaction
function to create both activities in one single transaction.
Whenever somebody in a market performs a repo transaction, their counterparty performs a reverse repo transaction. Consequently, a repo and a reverse repo represent the same transaction but from different perspectives:
From the seller's perspective, the transaction is a repo: a spot sale followed by a forward (re)purchase
From the buyer's perspective, the transaction is a reverse repo: a spot purchase followed by a forward (re)sale.
Overview of Participant Activities in Two Legs of a Repo/Reverse Repo
Repo |
Reverse Repo |
|
|---|---|---|
Participant |
Borrower Seller Cash receiver |
Lender Buyer Cash provider |
Spot leg |
Sells securities |
Buys securities |
Forward leg |
Buys securities |
Sells securities |
Features
You can portray repos with
or without collateral transfer
, that is to say, with or without delivery of the underlying securities.
The table below outlines the key differences and similarities of the two types of repo:
Repo WITH Collateral Transfer |
Repo WITHOUT Collateral Transfer |
|---|---|
Underlying securities are moved to the custody of the lender for the duration of the repo. |
Underlying securities are not moved to the custody of the counterparty. They remain in the custody of the borrower and consequently need to be given the status |
Underlying securities remain in the ledgers of the borrower (regardless of whether or not they have actually changed custody). |
|
Accrued interest is received by the lender. The interest amounts are shown in the class cash flow for the securities account (in the transaction |
Accrued interest is received by the borrower. Since the underlying securities are not transferred and therefore remain in the custody of the borrower, interest amounts are not represented in the system for repos without collateral transfer, neither in the class cash flow for the securities account nor in the position flow list. |
The interest installments are payable to the owner of the securities during the repo. |
|
The repo is represented as a short-term liability. |
|
Process
For a demonstration of how repos are depicted in the system with and without the transfer of collateral, see the following example.
Example
When you perform a repo, you effectively sell underlying securities to a buyer while agreeing to repurchase those securities after a specified period of time (term), with the repurchase price being greater than the original sale price (original sale price plus the repo rate). In this way, the buyer is effectively a lender providing a secured cash loan at a fixed rate of interest, using the security as collateral to protect themselves against default by the seller.
If you opt for a repo with collateral transfer, the underlying securities are moved to the custody of the lender, and, for the duration of the repo, the lender – as the new owner of the securities – receives the interest coupons, part of which need to be paid to the seller as the original owner of the securities. Simultaneously the securities must be reflected in the borrower’s balance sheet. Therefore in the system the transfer is reflected only in the class cash flow for the securities account, not in the position flow list, and the interest payments are adjusted accordingly.
For an example of the calculation of accrued interest, see Accrued Interest.
If, on the other hand, you opt for a repo without collateral transfer, the underlying securities do not change custody, and you – as the owner of the securities – continue to receive the interest coupons. For this reason, the system does not calculate accrued interest. Consequently, the transfer does not appear either in the class cash flow for the securities account or in the position flow list.
See Also
For more information about cash flows, see Cash Flow for a Class in a Securities Account.
Activities
For more information, see the following: