Collateral Management

CHAPTER 4Sale & Repurchase (Repo) Trades and Collateral – Classic Repo Trades

Definition of classic repo: the temporary loan of an asset to a borrower against receipt of collateral, for return at a later date, in return for cash interest.

 

A classic repo is one form of repo in which one party executes a repo trade directly with another party, on a bilateral basis. Other forms of repo include:

• Buy/Sell-Backs
• Tri-Party Repo
• Delivery by Value
• GC Pooling, and
• RepoClear.

These forms of repo are described within Chapter 7 ‘Sale & Repurchase (Repo) Trades and Collateral – Repo Trade Variations’.

4.1 CASH-BASED CLASSIC REPO TRANSACTIONS

Definition of a cash-based classic repo: the temporary loan of a specific cash amount, to a borrower, against receipt of bond collateral, for return at a later date, in return for cash interest.

 

This section focuses on one party’s requirement to borrow cash (as opposed to securities); this is known as a cash-based repo.

All repos are two-legged transactions. In a cash-based repo, the opening leg involves the payment of cash from the cash lender to the cash borrower, with bond collateral passing in the opposite direction. The closing leg involves the return of the cash amount borrowed plus cash interest (assuming a positive interest rate environment), against return of the bond collateral. This is depicted in Figure 4.1

FIGURE 4.1 ...