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The Futures Bond Basis, Second Edition by Moorad Choudhry

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AppendixA

REPO FINANCING AND THE CONCEPT OF THE ‘SPECIAL’

As we have seen from the foregoing, the financing of a basis trade is a crucial factor in deciding whether to put the trade on. It is important for practitioners to be familiar with the repo market in government bonds and where individual bonds are trading in repo.

The repo market is a vital element of the global capital and money markets. Repo, from ‘sale and repurchase agreement’, is closely linked to other segments of the debt and equity markets. From its use as a financing instrument for market makers to its use in the open market operations of central banks, and its place between the bond markets and the money markets, it integrates the various disparate elements of the marketplace and allows the raising of corporate finance across all sectors.

Repo is an interesting product because although it is a money market product, by dint of the term to maturity of repo trades, the nature of the underlying collateral means that repo dealers must be keenly aware of the bonds that they ‘trade’ as well. This multi-faceted nature of repo is apparent in the way that banks organise their repo trading. In some banks it is part of the money market or Treasury division, while in other banks it will be within the bond trading area. Equity repo is sometimes a back office activity, as is the longer established stock borrowing desk. However, it is not only commercial and investment banks that engage in repo transactions. Across the world, ...

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