SECURITIES LENDING & REPO MARKETS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2008

OVERVIEW OF THE SECURITIES FINANCING MARKETS

1.1.3

Comparison of both instruments

For the purpose of clarity, the following table sums up the main differences between repos and securities loans.

Figure 7: Comparison of repo and securities loan instruments

Repo

Securities loan

> The need to borrow and lend cash

> The need to borrow and lend securities

General motivation

> Buyer and seller

> Lender and borrower

Parties involved

> Overnight > Term

> Term > Open

With a right of exit (24- or 48- hours call) and/or a right of substitution, depending on conditions agreed between the parties

Maturity

With a right of recall of securities during the term of the transaction by the lender

> Securities against securities collateral or cash collateral

> Cash against securities collateral

Form of exchange

> Mainly equities > Bonds

> Mainly bonds > But an increasing equity repo market

Asset type

> Difference between sale price and repurchase price, quoted as separate repo rate > Coupon or dividend passed on immediately by the buyer to the seller of the security

> Fees for securities lent > Interest on cash collateral

Returns

> Coupon or dividend manufactured by the borrower to the lender

Coupon/dividend payment on the underlying security

Main legal documentation used in international markets

> GMRA standard agreement

> GMSLA standard agreement

Copyright CACEIS, 2010

It should be noted that both instruments can be combined and used one after the other as illustrated in figure 8; Instead of directly going to the repo market, dealers may in a first step go to the securities lending market to exchange lesser rated securities or equities against securities easier to finance on the repo market such as government bonds, and in a second step go to the repo market to exchange the government bonds obtained against cash.

Figure 8: Illustration of a financing arrangement combining securities lending and repo

1 - SECURITIES LOAN

Lending of lesser rated securities or equities

Party A LENDER

Party B BORROWER

Receipt of government bonds as securities collateral (or cash)

Sale of the government bonds in the framework of a repo transaction (Collateral)

Party A SELLER

Party C BUYER

Cash

2 - REPO

Copyright CACEIS, 2010

page 16 | Securities Lending & Repo markets