REPO transactions. REPO transactions with securities

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

REPO transactions can be called a new stage in the development of lending. They are a more convenient and reliable version of that. Securities are usually the subject of transactions of this type, since they have high liquidity and some other advantages. In some cases, the subject of the transaction may be real estate or other property. In addition, REPO transactions can be actively used during exchange trading.

It is worth noting that the necessary additions have already been made to the law on securities ("On the Securities Market", Federal Law), regulating the conduct of such operations. This made them even more reliable and eliminated the possibility of conflict situations between the parties.

Definition

REPO transactions are procedures during which the sale of any valuables is made, accompanied by their repurchase after a specified period at a price fixed at the time of the transaction. The reverse purchase is mandatory, representing the final (second) stage of the transaction.

Costthe value on which the parties rely in the first stage of the transaction is usually different from the value according to which the second stage will take place. The difference can be both big and small. This difference, expressed as a percentage, is called the REPO rate. In all cases, both prices are fixed at the conclusion of the transaction and do not change afterwards.

Application

The scope of REPO transactions is extensive. First used at the beginning of the 20th century, they are now signed by a huge number of individuals and organizations everywhere. They have become very popular at the interbank level, and can also be concluded by various organizations with banks or other organizations.

There are examples in which REPO transactions were concluded for other purposes. Namely, to obtain a loan, the obligations for which do not relate to credit debt and are not added to it at the documentary level. That is, by concluding a number of such transactions, an organization can receive a significant amount at its disposal, but not have a loan debt (according to documents).

In lending

Lending is the main purpose of REPO transactions. Such procedures are a convenient alternative to conventional lending schemes. In fact, the seller takes the buyer's money for temporary use by selling him valuables. At the second stage of the transaction, after a certain time has passed, the seller buys back the same valuables, regaining ownership of them, and the buyer - his money.

Ifif the seller does not have the amount necessary to redeem the valuables, they will remain the property of the buyer. That is why such procedures are considered the most reliable lending option. Their additional advantage is a fixed price, which is set at the time of the transaction and at which the seller will have to redeem the valuables at the second stage.

In stock exchange

During exchange trading, some participants are sometimes faced with the need to sell assets that they do not have available. In this case, a REPO transaction can be concluded with a person who has the required assets at his disposal. A bidder buys these assets from him and resells them at his own discretion, opening a "short" position. As time passes, the "short" position is closed, causing the values to return to the trader, who returns them to the original owner, completing the repo.

The original owners are usually stockbrokers. REPO transactions themselves were initially concluded only with securities, but now they can be carried out in relation to commodities and securities, since such operations are the most convenient way for brokers to provide traders with the opportunity to open "short" positions.

Views

There are many options for this procedure. For each group of cases, the parties can choose the most appropriate terms of the transaction. The main conditions under whichdistinguish different types of such transactions are timing and direction.

Terms mean the time after which the obligations of the second stage of the transaction will have to be fulfilled. Under the direction - the nature of the actions of each of the parties at the first and second stages of the procedure.

To direction

By direction, such operations can be considered direct or reverse. It depends on what role each of the parties plays at the first stage of the transaction. That is, for one of the parties, the transaction is direct, and for the other, it is reverse.

• Direct REPO transactions: the party acts as a seller who undertakes to make a subsequent buyback of the assets being sold.
• Reverse repurchase transactions: the party acts as a buyer, from whom the seller undertakes to buy back the valuables in the second stage.

By deadline

The due date is the period through which the obligations of the second stage must be fulfilled. On this basis, such transactions can be intraday, urgent or open.

• Open: they differ in that no deadlines are set, only a fixed price is set at which the valuables must be redeemed.
• Urgent: have a due date of the second stage of more than one day, before the expiration date is considered valid.
• Intraday: Valuables must be redeemed the next day.

Features

One of the peculiarities is how REPO transactions are accounted for. Despite the fact that during the procedure twicea sale is made (first by the seller to the buyer, and then back), only the profit received by one of the parties is taxed due to the difference in the amounts paid for the same assets at the first and second stages of the transaction.

Besides this, earlier there were some ambiguities that the parties should pay attention to. Subsequently, the Securities Act was duly amended to remove such ambiguities.

Benefits

The main advantage is the minimal risk. If one of the parties fails to fulfill its obligations at the second stage, either cash or other valuables for exactly the same amount will remain at the disposal of the other party. The only source of danger may be an excessively high dynamics of changes in the value of these values. Depending on the situation, this factor can bring both some additional profit and certain losses.

In addition, among the advantages that repo transactions have is the flexibility of conditions. The parties can choose the term that suits them and agree on a price that will be acceptable to each of them.

For buyer

For the party acting as the buyer at the first stage, the advantage is the ability to use the acquired values for their own purposes, before the second stage. This process is sometimes referred to as borrowing securities. Thanks to this advantage,REPO transactions with securities and other assets are so widespread in the exchange business.

If the purpose of the operation is to issue a cash loan, the buyer acts as a creditor. The fact that the valuables become his property serves as insurance in case the borrower fails to fulfill his obligations.

For seller

For the party carrying out the sale of valuables at the first stage, the advantage is the possibility of using the funds received at their discretion, before the second stage of the operation. Thanks to this advantage, procedures of this type have become an excellent alternative to classic lending.

When it comes to issuing a loan in securities, the seller will be the lender. The transfer of funds to his disposal will serve as insurance in case of non-return of valuables by the buyer.