1. Professor: 張健邦 Student name: 阮氏日麗 Student number: 10417625
Repurchase agreement
Professor: 張健邦
Student name: 阮氏日麗
Student number:

2. Does This make sense to you ?????
Opening example

3. Definition of repurchase agreement
A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day.
Repos are sometimes known as 'sale-and-repurchase agreements'. In some markets, the name ‘repo’ can be taken to imply repurchase agreements only and not sell/buy-backs. Repurchase agreements are also known as 'classic repo'. Repo, along with securities lending, is a type of 'securities financing transaction' (SFT).
For the party selling the security, and agreeing to repurchase it in the future, it is a repo; for the party on the other end of the transaction, buying the security and agreeing to sell in the future, it is a reverse repurchase agreement. Repos play a critical role in the money markets. They serve to keep the markets highly liquid, which in turn ensures that there will be a constant supply of buyers for new money market instruments.

4. How it work
Firstly , a securities dealer, such as a bank , sells securities its owns to an investor, agreeing to repurchase the securities at a specified higher price at a future date .
Second transaction : days or months later , the repos is unwound as the dealer buys back the securities from the investor .
The amount the investor lends is less than the market value of the securities, a difference call the haircut, to ensure that it still has sufficient collateral if the value of securities should fall before the dealer repurchase them.

5. example
Dealer repos $30 million par of a treasury bond to a municipality for 51 days. The market value of the collateral is $31,228,715. The municipality takes a 2% haircut, lending 98% of the market value, or $30,604, at a repo rate of 5.25%.
After 51 days, the municipality returns the $30 million bonds, and the dealer repays •$30,604, ( x 51/360) = $30,831,759.
•Note that repo rates are simple interest rates that use an actual/360 calendar (in the U.S.--Some other countries use actual/365).

6. Types of Collateral Treasuries Agencies Mortgage-backed securities
Even corporate bonds, equity, or custom collateral
Good Security Design
The repo market provides an excellent form of collateralization
Inexpensive financing for security holders
Relatively safe loans for short term investors

7. THIRD-PARTY REPURCHASE AGREEMENT
Types of repo
3 types of repos
SPECIALIZED DELIVERY REPO
the transaction requires a bond guarantee at the beginning of the agreement and upon maturity. This type of agreement is not very common.
HELD-IN-CUSTODY REPO
the seller receives cash for the sale of the security but holds it in a custody account for the buyer. This type of agreement is even less common since there is a risk the seller may become insolvent and the borrower may not have access to the collateral.
THIRD-PARTY REPURCHASE AGREEMENT
a clearing agent or bank conducts the transactions between the buyer and seller and protects the interests of each. It holds the securities and ensures the seller receives cash at the onset of the agreement and the buyer transfers funds for the benefit of the seller and delivers the securities at maturation. These agreements constitute over 90% of the repurchase agreement market, which holds approximately $1.8 trillion as of 2016.

8. Typical Market Participants
Cash Providers
Money market mutual funds
Insurance companies
Corporations
Municipalities
Central banks
Securities lenders
Commercial banks
Securities Providers
Securities lenders
Hedge funds /
Levered accounts
Central banks
Commercial banks
Insurance companies

9. Term of the Loan
If the duration of the loan is one day, the agreement is called an overnight repo. * Approximately 50% of the market.
Otherwise the agreement is a term repo * the term can be as long as one year. * The vast majority of repos have maturities of three months or less.
Open repo is an overnight repo whose term is renegotiated on an ongoing basis.

10. Is it risky ??
Repurchase agreements are generally considered safe investments because the security in question functions as collateral, which is why most agreements involve U.S. Treasury bonds.
The federal reserve enters into repurchase agreements to regulate the money supply and bank reserves. Individuals normally use these agreements to finance the purchase of debt securities.
Repurchase agreements are strictly short-term investments, and the maturity period is called the rate or term.

11. Credit Risk in Repo
For example : suppose a school district enters into a $10mm 30-day repo with a low capitalized dealer.
The dealer delivers $10mm worth of a t-note.
If the dealer is forced into bankruptcy and cannot repurchase the t-note, then the school district must sell the collateral in the open market to get its money back.
However, if the market has dropped, then the district will suffer a loss.
Both parties are subject to credit risk, because the market value of the collateral can change during the life of the loan.

12. Ways of reducing the credit exposure
Margin (Haircut)
Lenders often require a margin, or overcollateralization to limit their credit exposure (typically 1% to 3% for high grade collateral, but could be as high as 50% for some kinds if collateral).
Mark to Market on a regular basis
If the collateral value changes by too much, collateral levels or loan balances are adjusted.
1992: the first global master industry standard repurchase agreement

13. Retail Repurchase Agreement
Also known as a "retail repo.“
An alternative to regular savings deposits. Under a retail repurchase agreement, an investor buys a pool of securities in aggregate denominations of less than $100,000 for a term of less than 90 days. The agreement is not automatically renewable. 
Unlike regular savings deposits, retail repurchase agreements are not insured by the federal deposit insurance corporation, are not guaranteed, and may lose value. They are classified as securities transactions and, as such, are subject to default risk. 

14. Reverse Repurchase Agreement
A reverse repurchase agreement is the purchase of securities with the agreement to sell them at a higher price at a specific future date. 
Reverse repurchase agreements (RRPS) are the buyer end of a repurchase agreement. These financial instruments are also called collateralized loans, buy/sell back loans, and sell/buy back loans.

15. RRPs Uses
Repos are commonly used by businesses to gain access to short-term capital during cash flow issues.
In essence, the business sells a business asset, equipment or even shares in the company for a promise of immediate funding and promises to repurchase the item at a set future time.
The RRP is the investor or lending institution that makes the loans to the business in order to impute interest on the item upon repurchase. Short-term RRPS hold smaller collateral risks than long-term RRPS.
Over the long term, assets held as collateral can often depreciate in value, causing collateral risk for the RRP buyer.

16. Triparty RRPs
Part of the business of repos and RRPS is growing, as third-party collateral management operators are providing services to develop RRPS on behalf of investors and provide quick funding to businesses in need.
As quality collateral is sometimes difficult to find, businesses are taking advantage of these assets as a quality way to fund expansion and equipment acquisition through the use of triparty repos, resulting in RRP opportunities for investors.
This section of the industry is known as collateral management optimization and efficiency.

17. Components of an RRP
An RRP differs from buy/sell backs in a simple yet clear way. Buy/sell back agreements legally document each transaction separately, providing clear separation in each transaction.
In this way, each transaction can legally stand on its own without the enforcement of the other.
RRPS, on the other hand, have each phase of the agreement legally documented within the same contract and ensure the availability and right to each phase of the agreement. Lastly, in an RRP, although collateral is in essence purchased, generally the collateral never changes physical location or actual ownership.
If the seller defaults against the buyer, the collateral would need to be physically transferred.

18. Uses of Repos in Practice: Financing a Long Position
Dealers do not own all their inventory outright.
They can finance the purchase of a treasury by simultaneously entering into a repo using the same treasury as collateral.
Note that this amounts to a forward purchase of the treasury: establishing a long position in bonds with no cash up front.
This is an easy way to execute a levered bet on bond prices rising.

20. Uses of Repos in Practice: Short positions
Suppose a dealer wants a position that will profit if bond prices decline.
He can simultaneously enter into a reverse repo and sell the collateral.
He borrows the bond and sells it, using the proceeds of the sale to lend into the reverse repo.
At the end of the term of the repo, his loan is repaid with the agreed upon interest, and he buys the bond back in the open market to deliver into the reverse repo.

21. Uses of Repos in Practice: Running a Matched Book
The dealer may simply act as a market maker, or intermediary, entering into repo transactions with some counterparties, and offsetting reverse repos with others.
The dealer’s compensation is that the reverse repo rate (the dealer’s lending rate) is typically about 5 basis points higher than the repo rate (the dealer’s borrowing rate).

22. Determinants of the Repo Rate
The repo rate varies with
The quality of the collateral (agencies and mortgages may also serve as collateral in addition to treasuries)
the term of the loan, and
The nature of the delivery of the collateral. If the lender requires delivery of the collateral, he may get a lower rate than if he allows the counterparty to merely place the collateral in a separate account at his bank.

23. Special Repo Rates Sometimes certain treasury bonds go on special.
Current issues are often on special.
A short squeeze in which a lot of dealers who have shorted a particular bond need to cover their short positions can cause the issue to become special.
Reverse repos provide the dealer an opportunity to borrow issues on special.
In that case, the issue commands a special repo rate below the repo rate for general collateral.

24. Pricing: Specific Issues/ Specials
Supply
Total issuance size
Lendable/Non-lendable supply
Re-openings/buybacks
Distribution of supply
Demand
Overall size of short base
Distribution of shorts