CHAPTER 4

Repo Instruments and Structured Funding Vehicles

One of the largest segments of the money markets worldwide is the market in repurchase agreements or repo. A most efficient mechanism by which to finance asset positions, repo transactions enable market makers to take long and short positions in a flexible manner, buying and selling according to customer demand on a relatively small capital base. Repo is also a flexible and relatively safe investment opportunity for investors such as money market funds and corporate and local authority treasurers. The ability to execute repo is particularly important to overseas firms who might not have access to a domestic deposit base; where no repo market exists, funding is in the form of unsecured lines of credit from the banking system, which is restrictive for some market participants. An open market in repo, and its close cousin securities lending, is often cited as a key ingredient of a liquid equity and bond market. Repo is therefore a very important instrument.

In the United States repo is a well-established alternative money market instrument. By providing ready access to secured borrowing, and by enhancing liquidity in the securities markets, repo facilitates portfolio financing and the ability to run a short position in any bond. Banks can also use repo to extend credit to securities houses, who provide collateral in the form of government bonds and other high quality bonds. In this chapter we review the main uses of repo ...

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