Reverse Transactions. Repurchase agreement (or Repo) Example: Party A provides cash of 100 to Party B, Party B provides a bond worth 120 to Party A. Party.

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Presentation transcript:

Reverse Transactions

Repurchase agreement (or Repo) Example: Party A provides cash of 100 to Party B, Party B provides a bond worth 120 to Party A. Party A promises to return the bond to Party A one day later, Party B promises to return

Repurchase agreement (or Repo) NO CHANGE IN BASIC TREATMENT 1993 SNA treats this arrangement a collateralized loan. That is, B remains economic owner of security, it is only provided to A as security for the loan. (i.e., B retains economic ownership.) The one cent is interest on the loan. Other approaches – outright sale, four-entry. No consensus to change. Some people not fully happy with existing treatment, so leave on research agenda.

Repurchase agreement (or Repo) CLARIFICATION 1993 SNA assumed that Party A would not resell the bond. In fact, now they are often on-sold. (Change in economic circumstances.) If bond is on-sold by Party A to Party C, both Party B (original owner) and Party C think they are the owner of the bond – DOUBLE COUNTING. Solution – Party A should show a negative (short) position in its holdings.

Questions 1.Does the Group agree to continuation of the collateralized loan approach to reverse transactions? 2. Does the Group agree to the proposed clarifications? 3. Does the Group agree with the proposed to keep the treatment of reverse transactions on the research agenda?