An Introduction to Repo Markets, Third Edition

Chapter 9

ACCOUNTING, TAX AND REGULATORY CAPITAL ISSUES IN REPO

In this chapter we introduce issues of a regulatory, accounting, tax and capital nature associated with repo. They are introduced in overview fashion only because their specialised nature places them outside the scope of this book.

ACCOUNTING, TAX AND CAPITAL ISSUES

Accounting

The accounting treatment of repos reflects the commercial substance of the transaction, which is as a secured loan. For tax purposes the transfer of securities at the start of the trade does not count as a disposal, which tallies with the accounting treatment. However, tax treatment is different for the income in a repo. As a collateralised financing transaction, repos are on-balance sheet transactions. In a repo transaction for the seller, bonds given as collateral remain on the balance sheet of the seller. The corresponding liability is the repo cash. Coupon continues to accrue to the seller. The opposite is the case for the buyer. As an accounting entry a repo appears as a secured loan and not an actual sell transaction.

With regard to the profit & loss account, the repo interest (repo return) is treated as the payment of interest and is taken as a charge on an accruals basis – that is, it is entered in the books at the time of the transaction.

Taxation

The tax treatment of repo differs in each jurisdiction. In the UK the return on the cash leg of a repo is treated as interest and is taxed as income. Coupon payments during the term ...