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Additional Notes

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rowepascua
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© © All Rights Reserved
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Buyers in a repurchase agreement (repo) typically purchase the security with the intention of earning a short-term

return.Here are the main reasons why buyers engage in repos:


1. Short-Term Investment:
o Safe and liquid investment: Repos are generally considered safe and liquid investments, offering
a relatively low risk profile.
o Interest income: Buyers earn interest on the security during the term of the repo.
2. Liquidity Management:
o Excess cash: If a buyer has excess cash, they can invest it in repos to earn a return while
maintaining liquidity.
o Funding other investments: Buyers may use the funds from repos to finance other investments
or operations.
3. Regulatory Requirements:
o Reserve requirements: Some financial institutions may be required to maintain certain levels of
liquid assets. Repos can be used to meet these requirements.

Repurchase Agreements (Repos) are short-term debt instruments where a seller agrees to sell a security to a
buyer with the promise to repurchase it at a slightly higher price on a specified future date. Essentially, it's a form
of secured loan where the security acts as collateral.

The Philippine Context


In the Philippines, Repos have become an integral part of the financial landscape, serving several crucial functions:
1. Money Market Tool: Repos are a popular tool for managing liquidity in the money market. Banks and
other financial institutions use them to meet their short-term funding needs or to invest excess funds.
2. Central Bank Operations: The Bangko Sentral ng Pilipinas (BSP), the Philippines' central bank, employs
Repos as a key monetary policy tool. By adjusting the Repo rate, the BSP can influence interest rates in
the economy and control the money supply.
3. Securities Financing: Repos provide a mechanism for securities dealers and investors to finance their
holdings without outright selling them. This helps maintain market liquidity and stability.

Key Features of Philippine Repos


• Term: Repos in the Philippines typically have short maturities, ranging from overnight to a few days.
• Collateral: The collateral for Repos in the Philippines is usually government securities, such as Treasury
bills and bonds.
• Repo Rate: The interest rate charged on a Repo is known as the Repo rate. It is a crucial benchmark for
short-term interest rates in the Philippines.
Benefits of Repos in the Philippines
• Enhanced Liquidity: Repos contribute to a more liquid and efficient financial market by providing a
mechanism for short-term borrowing and lending.
• Risk Management: Repos can be used to manage interest rate risk and credit risk.
• Central Bank Control: The BSP can effectively control monetary policy through Repo operations.
Challenges and Considerations
• Counterparty Risk: The main risk associated with Repos is counterparty risk, which is the risk that the
other party to the agreement may default. To mitigate this risk, participants often use credit derivatives or
require collateral.
• Market Volatility: In times of market volatility, the availability and pricing of Repos can be affected.
Types of Repurchase Agreements (Repos)
Repurchase agreements (repos) can be categorized based on various factors, including their term, collateral, and
the underlying security. Here are some common types:
Based on Term
• Overnight Repos: These have a maturity of one business day. They are the most common type of repo.
• Term Repos: These have a maturity of more than one day, typically ranging from a few days to several
weeks.
Based on Collateral
• Government Security Repos: The collateral for these repos is government securities, such as Treasury bills
and bonds. These are the most common type of repo.
• Corporate Bond Repos: The collateral for these repos is corporate bonds.
• Mortgage-Backed Security Repos: The collateral for these repos is mortgage-backed securities.
Based on Underlying Security
• Equity Repos: The underlying security in these repos is a stock or other equity security.
• Commodity Repos: The underlying security in these repos is a commodity, such as gold or oil.

BONDS
Risks in Bonds
a. Credit or Default Risk may arise from a borrower's failure to pay the principal and/or the interest.
b. Interest Rate Risk is a possibility of loss due to changes in interest rates that affect bond prices.
c. Reinvestment Risk is the risk associated with the possibility of having lower returns when maturing funds
or interest earnings are reinvested.
d. Liquidity Risk is the possibillity of losses due to inability to sell or convert the bond into cash immediately,
or in instances where conversion to cash is possible but at a loss.
How to invest?
• Invest directly in individual securities issued by a government or corporation. The investor is the one who
assesses and makes the decision on which security to purchase.
• Buy units/shares of a collective investment scheme or a pooled fund thereby indirectly investing in securities
issued by a government or corporation. In this arrangement, various investors/participants pool their money and
entrust the same to a fund manager, who will be the one to select and buy the underlying securities as allowed by
the pooled fund's objective and policies.

Government Bonds
Tenor Coupon Frequency
Issued by the Philippine Government

Retail Treasury Bonds (RTBs) 3 years to 25 years Quarterly

Fixed Rate Treasury Notes (FXTNs) 3 years to 25 years Semi-annually

Republic of the Philippines (ROP)


10 years to 25 years Semi-annually
Bonds

Corporate Bonds Tenor Coupon Frequency

Bonds issued by Philippine Entities or


2 years to 25 years Quarterly, Semi-annually
Corporations

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