Repurchase Agreements and Other Reversible Transactions

1
Repurchase Agreements and Other Reversible
Transactions

• http//unstats.un.org/unsd/nationalaccount/AEG/pap
  ers/m3repurchaseAgreements.pdf

2
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 100.01.

3
Repurchase agreement (or Repo)

• PROPOSAL - NO CHANGE IN BASIC TREATMENT, BUT SOME
  CLARIFICATION
• 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.

4
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.

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Other Reversible Transactions

• May also exchange security for security (no
  loan)
• Securities lending.
• May exchange gold for money
• Gold lending.

6
Questions

• Do participants support the collateralized loan
  approach to reverse transactions?
• 2. Do such transactions occur in your country?