Reverse Transactions

1
Reverse Transactions
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)

• 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.

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.

5
Questions

• 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?