SECURITIES LENDING & REPO MARKETS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010

OVERVIEW OF THE SECURITIES FINANCING MARKETS

Figure 2 displays a valuated example of a repo transaction

Figure 2: Valuated example of a repo transaction

1.1

Trade date

16/09/2010 20/09/2010 20/10/2010

Settlement date Termination date

Term Seller Buyer

30 days Firm B Firm A

Security

Bund DBR 4% 4/1/18

Nominal amount

€10,000,000.00

Clean price

112.550685

Accrued interest

2.8493

All in price 115.40 Cash payment (purchase price) €11,540,000.00 Repo rate 0.40% per year

On termination, Firm A returns the securities to Firm B on a DVP basis and the Firm B re-pays Firm A the original cash amount of € 11,540,000.00 plus 30 days’ return on that cash at the agreed repo rate of 0.40% per year. The return is calculated as follows: € 11,540,000.00 x 0.40% x 30/360 = € 3,846.67

Copyright CACEIS, 2010

If rights of substitution of collateral have been negotiated up-front between the parties, the seller can get back the securities before the termination of the repo and substitute them with other securities of at least equal quality and value, acceptable to the buyer. Furthermore, a repo transaction can generally be terminated by the parties involved with a 24- or 48-hour advance notice (call). Such rights of substitution and 24- or 48-hours calls give sellers flexibility in managing their securities portfolios. Figure 3 schematises the typical lifecycle of a repo transaction, from its initiation to its termination.

Figure 3: Repo transaction lifecycle

3 - CONFIRMATION OF PURCHASE TRANSACTION Written or electronic confirmation issued on the day of the trade, including contract and settlement dates, details of repoed securities, identities of buyer and seller, haircut, term, rates, bank & settlement a/c details of the buyer & seller

2 - NEGOTIATION OF TERMS BETWEEN THE PARTIES

For clarity, processes have been simplified.

Nature of collateral delivered against cash, duration, rates

4 - SETTLEMENT Delivery of the securities and transfer of funds between the buyer and seller (DVP)

1 - MEETING OF THE FINANCING NEEDS > > Aseller needs cash/ wants to finance its securities available Abuyer wants to remunerate its cash available in a secured manner

REPO INITIATION

REPO TERMINATION

7 - REPURCHASE OF SECURITIES BY SELLER, PAYMENT OF CASH + INTEREST At the end of the repo (pre-defined term or on seller’s recall for open repos), the buyer resells the securities to the seller and deliver them via its custodian bank/sub-custodian network or ICSD). At the same time, the seller returns the funds to the buyer plus an interest calculated according to the repo rate negotiated up-front.

5 - DAILY MARK TO MARKET Daily mark to market to ensure that the cash received matches the daily market value of the securities sold in repo. Margin calls occur between the buyer and the seller

REPO IN PROGRESS

6 - POSSIBLE EVENTS:

Collateral substitution (if right of substitution) Re-pricing Corporate action on the securities sold in repo Prorogation of term

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Copyright CACEIS, 2010

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Securities Lending & Repo markets | page 11