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Introduction to Repurchase Agreements

The repurchase agreement (REPO) is a short-term agreement between two parties in which one party sells the security at a price to the other party with an agreement to repurchase the security at a fixed time and price.

Product Configuration

The configuration of REPO module is explained in detail in the following sections.

This is the top-level record created by the ID of the company referred. This record controls the following items:

  • The suffixes used for the creation of margin portfolio keys during a REPO and RESO contracts. These entries are used in REPO.TYPE for further configuration.
  • Initial margin booking.
  • Limit validation settings.
  • Automatic population of fields during the creation of a REPO contract.
  • Start-Of-Day (SOD) and Close-Of-Business (COB) settings.
  • Corporate action settings.

The fields in this record used for this feature are listed in the below table.

Field Name Description
Repo Margin Suf Indicates the suffix for the repo counterparty margin portfolio. The value in this field determines the portfolios used for the reporting of REPO, stock or borrow lending contracts.
Rp Mrgn Indicates the description of the Repo Margin Suf field.
Reso Margin Suf Indicates the suffix for the reverse repo counterparty margin portfolio. The value in this field determines the portfolios used for the reporting of RESO contracts.
Rs Mrgn Indicates the description of the Reso Margin Suf field.
Init Mrgn Booking Indicates the initial margin of a REPO contract, which undervalues the securities involved to cover the risk of the adverse movement of the securities, which may arise before a margin call. The values are:
  • Notional - Included in the margin portfolio valuation
  • None – Display-only.
Repo Limit Update Indicates whether the limit for a REPO contract is regarded as a LOAN or DEPOSIT.
Days Post Maturity Indicates the number of days after maturity the contract remains in the live table. After this period expires, the matured contract is moved to the history table during the COB processing.

The SBL contracts with zero nominal are moved to history after a specified period. However, if the contract is amended prior to this date, the nominal is increased to a non-zero value. The contract remains in the LIVE table until the specified time, as the nominal is again reduced to zero and the number of days specified is exceeded after restarting the day’s count. Once a contract is moved to the HISTORY table, it is not possible to restore the contract to a live contract. The contacts with zero nominal are not included in calculating corporate action for the stock concerned, unless there is an outstanding settlement.
Calculation Link Indicates the default copied into each REPO record as it is created and determines if there are links between certain fields during the creation of the REPO contract.
Auto Calc Nominal Indicates the cash amount entered in Principal Amount and any initial margin and calculates the amount of nominal required to exceed the cash amount if this field is set to Yes and the Trans Type field is set to Cash. This field is mandatory if the Calculation Link field is set to Yes.
Update Sc Pos Sod Indicates that the REPO contract generates the near leg SECURITY.TRANSFER record immediately on authorising the contract regardless of the value date if this field is set to Yes. .In addition, this field updates the SECURITY.POSITION because of the far leg of the SECURITY.TRANSFER, at the SOD of the maturity date instead of the COB of the maturity date as occurred so far. This is a display-only field
Process Repo Sod

Indicates if the forward dated REPO contracts become LIVE and the maturity of the REPO contracts. The contracts can be processed either the SOD or COB. The values are Null, Fwd To Live, Maturity or Both. If this field is set to Null, the transactions turn live or mature at COB. This field enables selective process of the contracts becoming live or maturing at SOD. If the Update Sc Pos Sod field is set to Yes, this field accepts only the values Maturity or Both.
Ent Cpn Susp Indicates if the RESO entries are posted to this specific account for corporate actions. This field allows the user to change the Account No field in the ENTITLEMENT record for the RESO positions.
Split Debit Cpn Indicates if the cash entries relating to REPO contracts are posted to separate Nostro account.

This process is enabled if the Account field is updated for the REPO application in the NOSTRO.ACCOUNT record. The NOSTRO.ACCOUNT record must be entered in the security currency of the DIARY.
Ac Block Clos Updt Indicates if the Ac Block Closure from the REPO application is automatically updated for field New Cu Acct No in REPO. If this field is set to No, updates are not made and the ACCOUNT.CLOSURE application closes the accounts in live REPO contracts.
Accrue Fee Indicates the fee that accrues until the contract matures for fixed term or until closed out for open trades, if this field is set to Yes. If value date is selected in charge frequency, the default is not to accrue. The fee amount posted on the repo contract accrues on a daily basis with the initial fee based on the current market value of the contract. After the first day, fee needs to be calculated based on the price stored on the SECURITY.MASTER and a COB should be run with the SECURITY.MASTER price being changed prior to the COB to ensure the accrual amount is correct.
Stp Allows auto STP creation of the opposite SBL Internal Trade, if this field is set to Yes. This field can be set to Yes or left blank.
Fee Refund Indicates the required refund of the fees, if the fee was taken on value date. For a fixed term contract the user can early mature the trade, if required. This is a Yes or No field.

This application holds the records, which control the processing of the REPO contracts. Each REPO contract must have a valid REPO.TYPE entered.

  • REPO.TYPE configuration as loan (REPO) or deposit (reverse REPO).
  • Product category used (CATEGORY record).
  • Suffix for the margin portfolios.
  • Definition of the customer REPO.
  • Category of the suspense accounts for customer REPOs (CATEGORY record).
  • Transaction type used for the customer REPOs (SC.TRANS.TYPE record).
  • Default delivery instructions.
  • Type of the REPO contract.
  • Definition of the Effective Rate field
  • The Link field links the opposite internal REPO.TYPE to allow auto creation of opposite trade.
The Effective Rate field indicates if the interest rate in REPO is expressed as a nominal interest rate or an effective rate (EIR). If this field is set to Yes, the REPO accruals are based on an effective rate.

A margin portfolio must be setup for any counter party used in the REPO contracts. This portfolio is used to run the valuations to determine whether a margin call is due or is to be expected.

Read the Securities User Guide for more information on setting the portfolio (SEC.ACC.MASTER) application. The suffix used to define the margin portfolio must match with the suffix defined in the REPO.TYPE record. If the bank performs both REPO and RESO transactions with any given counterparty, the user needs to open one portfolio for each operation.

The underlying CUSTOMER.SECURITY record for the REPO counterparty must have the value Customer in the Customer Type field before the user can successfully open the new portfolio.

The ASSET.TYPE records are required to record the securities that are on hold or loan status as part of the REPO and RESO contracts.

The Interface To field configures the ASSET.TYPE record and there must be a unique ASSET.TYPE record as shown in the below table.

Interface To Requirement
RP For REPO contracts
RS For RESO contracts
RPM If Init Mrgn Booking is set to Notional on REPO.PARAMETER required for REPO.
RSM If Init Mrgn Booking is set to Notional on REPO.PARAMETER required for RESO.
RPC For customer REPO contracts
RSC For customer RESO contracts

The SUB.ASSET.TYPE records are required to record the securities that are on hold or loan status as part of the REPO and RESO contracts.

The user must configure a SUB.ASSET.TYPE for each of the ASSET.TYPE records created in the previous section.

This record provides additional details for the REPO agreement type.

The Description field indicates the free format description of the Repo Agreement Type field.

Both legs of the REPO contracts are often transacted under one agreement. The PSA agreement is used in the US, while in Europe the PSA/ISMA General Master REPO Agreement (GMRA) is the standard agreement used.

The standard agreement types must be defined in this record and referenced to the REPO contract, to avoid defining complex narrative of the contract used for delivery purposes. If required, additional conditions may be specified in the contract, or if the contract is not subjected to a standard agreement type.

The REPO agreements can be tracked with the DOCUMENT.MANAGEMENT application. The REPO module can be linked to this application for the user to produce an override or stop the trading with new counterparty, until the full legal documentation is received and agreed.

Illustrating Model Parameters

The model parameters for Repurchase Agreements are explained below:

System level parameter for processing REPO deals are defined in this application, which holds the following details:

  • A Valid portfolio suffixes for the counterparty margin portfolio
  • The Booking method of initial margin
  • The limit update treatment for REPO deals
  • The number of days post maturity when contracts are moved to history
  • Processing of REPO deal at start of the day

REPO deals are usually transacted under an agreement. PSA agreement type is used in the US and PSA/ISMA general master REPO agreement are used in Europe. Standard agreement types should be entered into this application, and referenced on the REPO contract in the field agreement type.

Definition of all types of REPO contracts allowed in the system are defined in this application. It contains details such as category code, transaction index, default delivery, deal type etc.

Illustrating Model Products

Following products are available under REPO module.

S.No  Product Name Description
1 REPO A REPO is an agreement of sale and repurchase of a security. The securities are sold to the counterparty at a fixed price and the seller has a commitment to repurchase those securities at a pre-agreed price at a fixed point of time in the future. The price difference can be seen as the interest to deposit and maybe defined as a cash price or as a repo rate.
2 Reverse REPO(RESO) A RESO is an agreement of purchase and re-sale of a security, which is also a converse of a REPO agreement. The securities are purchased at a fixed price and the buyer has the commitment to re-sale those securities at a pre-agreed price at a future date. The price difference can be seen as interest to the loan and maybe defined as price.
3 Sell-Buy Back A sell or buy back is an agreement of a spot sale and a forward repurchase of a security. This is different from REPO agreement as the sale and purchase are treated as two separate legs. Hence, an agreement is not required.
4 Buy-Sell Back A buy or sell back is an agreement of a spot purchase and a forward sale of a security. This is different to REPO agreement as the purchase and sale are treated as two separate legs. Hence, an agreement is not required.

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Published on :
Tuesday, May 28, 2024 6:38:50 PM IST