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The repo markets-34

Authors
Publisher
Elsevier Ltd
Identifiers
DOI: 10.1016/b978-075064677-2.50040-1
Disciplines
  • Economics

Abstract

Publisher Summary This chapter reviews the main uses of repurchase agreements (repos) and their structures. It presents a comprehensive review of basis trading strategy and the implied repo rate. There are two main repo types in operation in different markets. The chapter considers the operation of a classic repo, the type prevalent in the UK and US bond markets. In addition to classic repo there also exists sell/buy back and securities lending. The growth in repo across markets globally can be attributed to the growth in non-bank funding, ease of transaction, expansion in public sector debt levels, and increased volatility in interest rates. A repo agreement is a transaction in which one party sells securities to another and at the same time as part of the same transaction commits to repurchase identical securities on a specified date at a specified price. The seller delivers securities and receives cash from the buyer. The repo mechanism allows for compensation for use of a desired asset. If cash is the desired asset, the compensation for its use is simply the repo rate of interest paid on it. Cash rich money market investors finance bond traders, by lending out cash in a repo. They receive general collateral (GC) in return for their cash, which is any bond of the required credit quality.

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