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The repo , whose French legal name is delivered Pension , is the nickname universally used which was given to the United States with the repurchase agreements , or agreements of repurchase , important financial instruments of the Money market.

Definition

It is acted as substance of the preparing, in the legal form of two cash transactions in opposite direction and shifted in time, a transfer followed by a repurchase at the end of the operation, the refinancing of negotiable financial credits (obligations, BTAN, certificates of deposit, actions, etc) with a Interest rate negotiated between the two contracting parties, the lender of the titles and the lender of the cash.

The lender of the titles is thus the borrower of the cash and, opposite him, its counterpart the money lender is the borrower of the titles.

To schematize, one can say that the repo is the modern adaptation, by the financial markets, of an unmemorable instrument, the loan against security .

Cut market

According to ISMA, International Securities Market Association , international professional organization of the financial markets, incur it rest in life exceeded, at the end of 2004, 8.000 billion American dollars, primarily with very short term (less than three months). Approximately 45% were made out in dollars and hardly less were it in Euro.

Legal framework

In the euro area, the repo replaced very quickly as of 1999 the old national legal forms of refinancing of titles, and follows quasi-universellement convention-tallies it developed by the ISMA.

There is, by the repo, transfer certainly temporary but whole of the property of the titles of the lender to the borrower of those. In particular, the possible coupons falling during the repo remain property of the borrower of the titles, and it is thus advisable to hold of it account in the calculation of flows of the operation.

The repo thus has all appearances and characteristic of a cash sale followed by a repurchase, except the accounting treatment and tax which, is to him that of a loan/loan of cash, and which is unaware of the " part; titers" operation.

Thus sometimes for tax reasons, one uses in certain countries an alternative called in English the Sell and Buyback , that is to say thus sale with repurchase , which entirely materializes, it, by two cash transactions, for which there also exists convention-tallies of the ISMA.

Two quite different objectives

There exists in fact two segments quite distinct from the market of the repo, though generally they are reserved for the same teams:

that of the bulk , where what imports it is the operation of refinancing , and thus interest rate, not theunclaimed one;
that of the specific , where one seeks with to cover punctually short positions in such or such title.

The bulk

The market known as of the bulk (in English: general collateral or GC ), true market monetarist-(a), is most important by far of these two segments in term of amounts. As it brings a safety increased compared to traditional interbank deposits, it is supplanting the traditional money market and its share in the treated amounts increases each year.

Structurally, one will rather find like lenders of titles on the market of the repo in bulk the banks of investment and the insurers, seeking to refinance their positions in titles, and rather like money lenders the organizations of collective management, in particular for the account of their monetary OPCVM.

The specific

The market known as of the specific represents, him, a small portion of volumes, but a considerable share of the margins released overall by the rest. The legal framework is generally the same one, although there exists in France since the middle of the years 1990 a standard contract of ready of title , which forever truly succeeded in imposing itself.

The more one title is required, low will be the rates of repo with which it will be treated. They can even be sometimes negative interest rates, for titles punctually rare. The profit of the lenders of titles will come from replacement to monetary market rate from the money received in guarantee. One finds, on this market segment, an quasi-inversion of the traditional roles held on the market of the bulk : the banks of investment generally seek there to borrow titles, to ensure the specific cover their positions, with opposite them the holders structural of wallets of placement, i.e. the insurers and organizations of collective management.

Financial flows

Financial flows of a repo concluded with a interest rate in fine T are in general the following:

cash sale, with delivery on a date D1 , of a par value NR of titles for a numerary amount M1 ,
accompanied by an engagement of repurchase by yielding, at a date D2 , the same nominal one, for an amount m2 correspondent with M1 increased interests of the repo:

M2 = M1. (1+T. \ frac {(D2-D1)}{360})

Rebate

The higher the credit of the salesman of titles (= borrower of the cash) is with the eyes of its counterpart, and the more M1 could be close to the value of market VM of the titles. On the other hand, the application of a rebate (the report/ratio (VM - M1) /VM) ) important will aim to limit the credit risk supported by the lender of the cash. By limiting the capacities of refinancing of the salesman establishment of the titles, it will result in to as decrease the importance of the risks as this one can take on the financial markets.

The application by the principal American and European banks of investment, for reasons of commercial competition, too weak rebates with some Hedge fund S with the courses of the years 1990 indirectly caused a major crisis of the international financial system at the summer 1998. The funds Long Term Capital Management had thus been able to build and refinance gigantic positions on the markets of interest rate, equivalent to several tens of time the funds which it managed, whose liquidation required the active intervention of the central banks.

Calls for additional cover

In order to ensure the greatest safety of the transactions, and in addition to the rebate possibly applied, the titles are generally revalued periodically, and of the calls for additional cover in cash allow to readjust the amount actually lent according to the fluctuations of the market.

Renewable Repo

Certain rest is concluded for one unlimited duration or one limited duration being able to be taken back tacitly. A part can put an end to it by preventing the other with a notice (generally 24 or 48 hours) which was agreed initially. In this case, the rate of the repo is generally fixed compared to the fluctuating rate from day to day (for example EONIA -0.25%)

Old French legal forms

In France, until the adoption of the laws defining the pension delivered on the Anglo-Saxon model of the repo in 1993-94, legal forms used, for want of anything better, for the refinancing of titles were:

is the Réméré, i.e. a sale together with a simple faculty of repurchase, and not an firm agreement of repurchase;
is, worse still, the pension without delivery.

This system made run an important systemic risk to the whole of French financial industry.

See too

Rate repo

External bonds

ISMA - European Repo Council

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