Repo trades are a very popular and flexible mechanism by which cash is borrowed against securities collateral delivered to the cash lender.
Along with securities lending & borrowing trades, repo trades fall within the general grouping of transaction types known as securities financing.
This section describes the reasons for the lending and the borrowing of cash, the benefits to both lender and borrower, the various methods of trade execution and the role collateral plays in such trades.
3.1 INTRODUCTION TO REPO
A repo is a transaction in which one party lends cash to a borrower at an agreed interest rate, and the cash borrower immediately provides collateral in return in order to mitigate the cash lender’s risk. At the close of the transaction those asset flows are reversed; the cash borrower repays the cash plus interest (in a positive interest rate environment), and the cash lender returns the collateral.
Alternatively, with the emphasis on the securities (as collateral), the transaction may be described as follows: the cash borrower sells the securities for immediate settlement against cash and simultaneously agrees to repurchase ...