ICMA professional repo market course

London, 20-21 November 2012

repurchase agreements, sell/buy-backs, etc

Richard Comotto
ICMA Centre
University of Reading
United Kingdom
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repurchase agreements, sell/buy-backs, etc

repurchase agreement v sell/buy-back
types of repurchase agreement
GC v specials
specials and securities lending

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repurchase agreement v sell/buy-back
repurchase agreement
also known as classic repo
pension livre in France
sell/buy-back
also known as buy/sell-back or just sell/buys
gensaki in Japan
simultaneas in Spain

repurchase agreement v sell/buy-back

repurchase agreements
undocumented sell/buy-backs
documented sell/buy-backs

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repurchase agreement
term 1 week
collateral 3.5% OBL-1XX 10/10/XX
nominal value EUR 10 million
clean price 101.50
accrued interest 8 days
repo rate 2.10%
market value EUR 10,157,671.23
purchase price EUR 10,157,671.23
repo return EUR 4,147.72
repurchase price EUR 10,161,818.95

repurchase agreement
nominal value x clean price = clean value
10,000,000 x 101.50
--------- = EUR10,150,000.00
100

nominal value x coupon =accrued interest

3.5 x 8 = EUR7,671.23
10,000,000 x -------------
100 x 365
clean value + accrued interest = market value
10,150,000.00 + 7,671.23 = EUR10,157,671.23

NB coupon calculation uses bond market basis

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repurchase agreement
repo return
using initial margin (none = 100%)
10,157,671.23 2.10 x 7 = EUR4,147.72
------------------- x -------------
100% 100 x 360
using haircut (none = 0%)
2.10 x 7 = EUR4,147.72
10,157,671.23 x (1-0%) x -------------
100 x 360

repurchase agreement
repo return
2.10 x 7
10,157,671.23 x ------------- = EUR4,147.72
100 x 360

repurchase price
10,571,671.23 + 4,147.72 = EUR 10,161818.95

NB repo return calculation uses money market basis

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repurchase agreement

EUR 10,000,000 nominal

3.5% OBL-1XX 10/10/XX
purchase

EUR 10,157,671

seller buyer

EUR 10,161,819

repurchase
EUR 10,000,000 nominal
3.5% OBL-1XX 10/10/XX
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repurchase agreement

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sell/buy-back
term 1 week
collateral 3.5% OBL-1XX 10/10/XX
nominal value EUR 10 million
clean price 101.50
accrued interest 8 days
forward price 101.47435387
(equivalent repo rate 2.10%)
market value EUR 10,157,671.23
purchase price EUR 10,157,671.23
repurchase price EUR 10,161,818.95

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sell/buy-back
repurchase price - purchase price = repo return
10,161,818.95 10,157,671.23 = EUR4,147.72

repo return
4,147.72
------------------- 100 x 360 = 2.10%
-------------
10,157,671.23 7

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sell/buy-back

EUR 10,000,000 nominal

3.5% OBL-1XX 10/10/XX
purchase

EUR 10,157,671

seller buyer

EUR 10,161,819

repurchase
EUR 10,000,000 nominal
3.5% OBL-1XX 10/10/XX
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sell/buy-back

NB 14
repurchase agreement v sell/buy-back
repurchase undocumented
agreement sell/buy-back
contract single separate
margin yes no
substitution yes no
coupon immediate deferred
written agreement yes no
variants yes no
cost operational, legal minor
economic effect secured loan secured loan
transfer of title yes yes

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sell/buy-back
recognition of collateral in capital adequacy
calculations requires:
documentation with rights of close-out & set-off
margin maintenance
but some counterparties, some countries have:
legal problems with repurchase agreements
operational problems with repurchase agreements
solution = incorporation of sell/buy-backs into
documentation

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repurchase agreement v sell/buy-back

legally operationally
repurchase
agreement 1 instrument 1 instrument

undocumented
sell/buy-back 2 instruments 2 instruments

documented
sell/buy-back 1 instrument 2 instruments

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sell/buy-back

instead of margin maintenance: early termination & replacement

purchase termination repurchase

date date date

new
purchase
date

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sell/buy-back

buyer seller

purchase date +10 collateral -10 collateral

-10 cash +10 cash

termination -9 collateral +9 collateral

+10.1 cash -10.1 cash

new repo +10 collateral -10 collateral

-10 cash +10 cash

net +1 collateral -1 collateral

+0.1 cash -0.1 cash
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sell/buy-back

sell ticket buy ticket buy ticket

purchase termination repurchase
date date date

sell ticket
new
purchase
date

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types of repurchase agreement
fixed-rate repo
floating-rate repo
open repo
term repo
forward repo
synthetic repo

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types of repurchase agreement

fixed-rate repo
fixed repurchase date
fixed repo rate
return due at repurchase date

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types of repurchase agreement
floating-rate repo
fixed repurchase date
repo rate linked to index, regularly updated
return due at repurchase date
EONIA-linked repo:
do not compound but arithmetic average
may use penultimate fixing for last 2 days
term rate-linked repo: when to pay return?
term repo are usually floating-rate

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types of repurchase agreement

open repo (on demand, terminable on demand)
no initial repurchase date: option of buyer or seller
repo rate reset by agreement
return due at later of repurchase date, month end
evergreen repo is an open repo with an extended
notice period

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types of repurchase agreement
term repo
fixed repurchase date in one year or beyond
funding in cash or near cash
floating repo rate, rights of substitution
return due periodically
illiquid assets
deep haircuts with pledge-backs or in trust
haircut ratchet
early termination safeguards
separate margining

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types of repurchase agreement

forward repo
later than conventional purchase date (T+2)
default is T+3, but can be set later
can defer collateral selection until P-2

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types of repurchase agreement
who has ownership, who has risk/return?

collateral

cash

cash

collateral

repo

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types of repurchase agreement

who has ownership, who has risk/return?

collateral

cash

outright/cash transaction

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types of repurchase agreement
who has ownership, who has risk/return?

+ total return -

LIBOR+

total return swap

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types of repurchase agreement

who has ownership, who has risk/return?

collateral

cash
+ total return -

LIBOR+

synthetic repo

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types of repurchase agreement
synthetic repo
repurchase by gentlemans agreement
cash costs LIBOR+ rather than repo rate
but balance sheet neutral = capital saving
also circumvents restrictions on repo
only ISDA documentation needed

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GC v specials markets
general collateral (GC)
basket of generally-acceptable collateral
driver of GC transactions is cash
GC repo is an alternative to the unsecured lending of cash
GC repo rate correlated with money market rates
GC repo is a money market instrument
special collateral
strong demand specific piece of collateral
buyer offers cheap cash to seller
driver of special transactions is security
special repo is an alternative to securities lending
special rates is uncorrelated with money market rates
special repo is a capital market instrument

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GC v specials markets
2.0

LIBOR
1.5

1.0
specialness
GC repo GC repo
0.5 LIBOR
special

0.0

-0.5

-1.0
special

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specials and securities lending

dealer borrows bond A and lends bond Z

bond A

bond Z

fee
dealer

bond Z

bond A

bond borrowed transaction

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specials and securities lending

dealer borrows bond A and lends bond Z

bond A bond Z

cash cash

specials rate
dealer GC rate

cash cash

bond A bond Z

reverse repo repo

GC rate specials rate = specialness spread = securities lending fee
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