REPURCHASE

AGREEMENTS
PRESENTED BY

 RABIA RIAZ (BT-04-28)

 MARIAM ALI (BT-04-36)
 AMNA AHMED (BT-04-04)
What are REPURCHASE
Agreements??

A repurchase agreement (RPs or repos) is a

sale of securities coupled with an agreement to
repurchase the same securities at a higher
price on a later date.
A repo is thus broadly similar to a collateralized
loan.
Repurchase agreemants cont.
 There is a temporary rise in reserves
of buyer.
 Thus, repurchase agreements are
used when there is a temporary fall in
reserves of seller.
History..
Repo was introduced in 1998 by the Fixed
Income Clearing Corporation (FICC) and two
large dealer banks, JPMorgan Chase
Bank(JPMC) and Bank of New York (BoNY), to
reduce transaction costs and enhance liquidity
in the repo market.
Average daily net settlement volume in General
Collateral Finance Repo rose from $11.3 billion
in 2000 to $101.3 billion in 2002,
REVERSE REPURCHASE
AGREEMENT
 Reverse repo is simply a repurchase
agreement as described from the buyer's
viewpoint, not the seller's. Hence, the seller
executing the transaction would describe it as a
'repo', while the buyer in the same transaction
would describe it a 'reverse repo'. So 'repo' and
'reverse repo' are exactly the same kind of
transaction, just described from opposite
viewpoints.
 Reverse repurchase agreements are used
when there is a temporary rise in excess
reserves.
Collateral
 Collateral is assets provided to secure an
obligation. Traditionally, banks might require
corporate borrowers to commit company assets
as security for loans.
 Repo use collaterized agreements for
transactions
Collateral
 Collateral Seller: The party that are
selling the securities are collateral
seller. (sale/repurchase)
 Collateral Buyer: The party with the
reverse repo (purchase/resale) are
collateral buyer.
TYPES OF COLLATERAL
Types of collateral used are..
 T bills
 Cash
 Government bonds
 Corporate bonds
 Shares
Motivations for repos

 For the buyer, a repo is an opportunity to

invest cash for a customized period of time

 The seller gets the cash in time of need.

Market for repurchase agreements
 Many financial and non-financial
corporations take both repo and reverse
repo positions.
 A bank, for example, might loan funds to a
dealer with an open reverse repo (collateral
buyer), while financing part of its short-
term loan portfolio with a term repos
(collateral seller).
Market for Repurchase
Agreements

 Federal funds are deposits of banks and deposit

institutions with the Federal Reserve (Fed) that
are used to maintain the bank’s reserve
position required to support their deposits.
MARIAM ALI
BT-04-36
Types of Repo Maturities
There are three types of repo maturities.
 Overnight: it refers to one day maturity

transaction
 Term: It refers to repo with a specified end

date.
 Open repo: It has no end date.
Maturity period of repo

Most repos have very short terms to maturity

i.e. from 1 to 14 days, but now there is a
growing market for longer-term that is 1 to 3
months.
Types of Repurchase Agreements
 Due bill/hold in-custody repo
 Tri party repo
 Whole loan repo
 Equity repo
 Sell/buy backs and buy/sell backs
Due bill/hold in-custody repo
In a due bill repo, the collateral pledged by
the (cash) borrower is not actually delivered to
the cash lender. Rather, it is placed in an
internal account ("held in custody") by the
borrower, for the lender, throughout the
duration of the trade. Because of the risk it is
less common.
Tri-party repo
In tri-party repo a custodian bank or
international clearing organization acts as an
intermediary between the two parties to the
repo. The tri-party agent is responsible for the
administration of the transaction including
collateral allocation, marking to market, and
substitution of collateral.
Whole loan repo

A whole loan repo is a form of repo where

the transaction is collateralized by a loan or
other form of obligation (e.g. mortgage
receivables) rather than a security.
Equity repo

The underlying security for most repo transactions is

in the form of government or corporate bonds Equity
repos are simply repos on equity securities such as
common (or ordinary) shares. Some complications
can arise because of greater complexity in the tax
rules for dividends as opposed to coupons.
Sell/buy backs and buy/sell backs
A sell/buy back is the spot sale and a forward
repurchase of a security. The basic motivation
of sell/buy backs is generally the same as for a
classic repo, i.e. attempting to benefit from
the lower financing rates generally available for
collateralized as opposed to non-secured
borrowing
Securities lending
 The general motivation for repos is the
borrowing or lending of cash. In securities
lending, the purpose is to temporarily obtain
the security for other purposes, such as
covering short positions or for use in complex
financial structures. Securities are generally
lent out for a fee.
 Securities lending trades are governed by
different types of legal agreements than repos.
Taxation
 Tax is also applied to repo but only in
the case when the ownership remains
with the seller of securities.
Credit Evaluation
Before conducting any repo
transaction participants conduct
credit evaluation and impose a credit
limit on their counterparties. A formal
credit evaluation involves getting
information about the financial
capacity of the counterparties.
AMNA AHMED
BT-04-04
Marking-to-Market
A decline in the market value of the
securities sold in repos creates a credit
exposure for the repo buyer, as the value
of the securities asset is now lower than
the cash value. To Solve this problem
marking-to-market is practiced to revalue
repos using current market prices. The
value of all repos are usually marked-to-
market (or re-priced) on a daily basis to
reflect changes in market prices and to re-
calculate exposures.
Margin call
Mark-to-market margining allows
repo buyers to call for additional cash
or securities assets from the seller.
Notification and settlement of margin
calls should be timely and damages
for nonperformance of margin calls
should be established in legal
agreements.
Risks in repurchase
transactions
 Interest Risk
 Increases with
 the time to maturity of the underlying
security
 the length of the repo contract
 Credit Risk
 A possibility that either party may fail to
honor the future transaction
 Operational Risk
 If ownership of the repoed security is not
transferred on the official registry
Risks
 If the borrower (collateral seller) cannot
buy back the underlying securities, the
lender is left with securities whose price
could or may already have decreased.

 To minimize such risk, a repo agreement

may require that the borrower set up an
initial margin in the form cash.
Who buys repo

Money funds are the buyers of repo

Repurchase agreements in Pakistan

 Shift its monetary policy target

 It answers to many needs of state bank
and large industries.
Trading process of repurchase
agreement
 Arranged either directly between two parties or
with the help of brokers and dealers
Example of t-bills
 The repo buyer arranges to purchase T-bills
from the repo seller with an agreement that
the seller will repurchase the T-bills within a
stated period of time
Master Agreement
 A master agreement is a legal document
that specifies the terms that apply to all
transactions between parties, or a defined
subset of transactions, including remedies in
the event of counterparty default.
 Global Master Repurchase Agreement (GMRA)
is commonly used for repos.
Transaction processing of repurchase
agreements
Corporate A Corporate B
Investor Borrower

J.P. Morgan Bank of America

Buys a $75M Repo Sells a $75M Repo

FRBNY Fedwire cash FRBNY

Today: -$75 from R/A of JP Morgan Today: +$75 from R/A of JP Morgan
+$75M to T-Bond Account Fedwire T-bill -$75M to T-Bond Account
of JP Morgan Fedwire cash of JP Morgan
Day+1: +$75M + Int. to JP Morgan Day+1:-$75M + Int. to JP Morgan
- $75M to T-Bond Account Fedwire T-bill
+ $75M to T-Bond Account
of JP Morgan of JP Morgan
Repurchase agreement yield
calculation

Calculating the Yield on a Repurchase Agreement

Pf  P0 360
i RA  X
P0 h
Uses and advantages
 A position in repurchase agreements enhances
a fund's ability to handle day-to-day cash flow
needs .
 In contrast with direct operations, these agreements
provide temporary financing of cash shortages and
surpluses, but do not directly influence supply and
demand in the instrument used as collateral.
 Improvements in the T-Bills market
 Less credit risk
 Reduce transaction cost
QUESTIONS??????