BASKET REPO, SYNTHETIC REPO AND STRUCTURED FINANCE REPO
The repo examples considered earlier were all single-name repos. In this chapter we consider basket repo, which is a repo of a portfolio of bonds. We also look at total return swaps, which are economically a form of repo and sometimes called ‘synthetic repo’, and the use of repo in structured finance vehicles known as ‘conduits’.
Banks, securities houses and hedge funds often repo out entire portfolios of bonds with a repo market maker. This is known as a basket repo and is operationally more convenient because it is treated as one repo trade rather than a large number of individual bond repo trades. Such treatment makes the cash flows easier from an operational point of view. The mechanics of a basket repo are identical to that for a single-name bond classic repo.
Illustration of basket repo trade: Malaysian Government securities
We assume a securities house buys the current three Malaysian Government international bonds that are denominated in US dollars.
shows the three bonds and the cash flows associated with financing them. Imagine the securities house, ABC Securities Limited, wishes to fund them using repo. It arranges a basket repo with an investment bank, with the following terms:
|Trade date||28 May 2004|
|Value date||3 June 2004|
|Repo maturity date||30 August 2005|
|Interest reset||1 month|
|Wired proceeds||USD 27,043,002.10|
|Rate||1.33 (1-month Libor fix of 27 May 2004 plus 22 bps)|
|Interest||USD 32,969.93 ...|