Repurchase agreement

A repurchase agreement, or repo ( English abbreviation for Sale and repurchase agreement) is a short-term financial instrument with a maturity of generally no more than one year, often even only a few days or a night (so-called overnight repo ).

A repo is from the perspective of the securities seller ( Seller ) is a financial transaction that combines a simultaneous sale and repurchase of an asset (usually securities). These are genuine repurchase agreements, in which the estate passes ownership from the seller to the buyer during the term.

• 3.1 General Collateral
• 3.2 Special Collateral

Structure

In a repurchase agreement, the board shall undertake ( and borrowers, cash taker or cash borrower, seller takes repo position ), the pledgee (also lenders or cash lender, buyer takes reverse repo position ) assets - usually fixed-income securities - to leave in return for an agreed sum of money and at maturity, to (re) payment of the agreed amount plus interest, to take back. Because the repo buyer undertakes to deliver identical securities at maturity, is this is a genuine sale and repurchase agreement.

Repurchase agreements are part of the money market and serve institutional investors, primarily banks, the provision of liquidity in the interbank market, as well as with central banks in the context of open market operations. In addition to short-term repurchase agreements by institutions in their seat States, there is a risk independent equity ratio (so-called leverage ratio ), often used to the time of notification lowering the total assets, so as to reduce the capital requirements as well ( window dressing ).

Calculate Price

The beginning of the transaction price to be paid ( purchase price ) equal to the market value of the underlying security (current price plus accrued interest), less a security discount ( haircut ).

The redemption price (repurchase price) is calculated from the purchase price plus an agreed interest rate ( repo rate, repo rate) which depends on the quality of the security. Interest rates are per annum (per year) of 365 days calculated.

Funding obligation - Margin Call

Should the value of the security to fall, there is a funding obligation ( Margin Call or variation margin ).

To protect themselves against price declines in bond, for payment of the purchase of a haircut is made. If at publicly daily revaluation of the value of the bond, a fall in prices, which is higher than the haircut, the Buyer may perform a margin call. The margin call requires the Seller to an additional delivery of the bond, or a cash settlement.

If the price increases, the reverse case applies, the Buyer is then assessable.

If the value of the bond below the margin levels with respect to the clean price, the repo buyer is worse off.

Repo rate

Due to the provision of security repo rates are generally among the matched maturity interest rates for unsecured loans.

Short-term liquidity, secured investment, favorable lending rates and interest rate speculation may be reasons for repo transactions.

When buying back the bonds by the Seller the Buyer receives the interest rates ( repo rate ) for the chosen him credit, which relate solely to the identical buying and selling price of the bond for the period of assignment. The accrued interest on the bond is entitled to the Seller. Thus the repo rate can be understood as the price of liquidity.

At the end of the business of Repo Buyer receives from the repo seller the original clean price minus the haircuts for repo rate interest back.

Species

We distinguish between two types of repurchase agreements, which set a different motivation underlying security and the one used by the type of the collateral (English collateral ) is different:

General Collateral

In general collateral repo is the purchase of short-term liquidity in the foreground. It does not matter which securities used as collateral as long as it meets certain quality requirements concerning borrower quality, market liquidity and currency of issue. Due to the clear conditions, repos of this type can easily standardize and their market share is about 70 % of all calls made buyback agreements. The high quality of the underlying collateral is responsible for ensuring that the repo rate is usually below the money market interest rate.

The European Central Bank accepted until the financial crisis for their repurchase agreements or refinancing operations of the banks, no securities with a rating below A- ( in the name of Standard & Poor's). During the crisis, but this criterion was relaxed. Greece with the worst rating in the European Union currently has a Standard & Poor's rating of CCC (as of July 16, 2012 ).

Special Collateral

At a Special Collateral is, similar to securities lending, procurement of a particular security in the foreground. There are securities purchased with the agreement to sell them back later. The borrower takes a " secured loan " while the donors thus has a secured investment of surplus cash. Any income of the securities during the term of the transaction fall to the funders as a temporary owner of the securities. The income is recognized in the redemption price later.

Taxation

Genuine repurchase agreements and reverse repurchase agreements are not subject to Mehrwert-/Umsatzsteuer as financing transactions. To differentiate to buy / sell back - stores the International Capital Market Association ( ICMA) has drawn up a contract template.