|
Customer |
|
Dealer |
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Customer |
At maturity:
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Funds + interest |
Funds + interest
A repo (from the dealer's perspective) finances the dealer's long position (collateralized borrowing).
A reverse repo (from the dealer's perspective) finances the dealer's short position (collateralized lending).
Picture 1 — a schemes of a repo and a reverse repo [2].
A sell/buy back is the spot sale and a forward repurchase of a security. The basic motivation of sell/buy backs is generally same as for a classic repo i.e. Attempting to benefit from the lower financing rates generally available for collateralized as opposed to non-secured borrowing. The economics of the transaction are also similar with the interest on the cash borrowed through the sell/buy back being implicit in the difference between the sale price and the purchase price. There are a number of differences between the two structures. A repo is technically a single transaction while a sell/buy back is a pair of transactions (a sell and a buy). A sell/buy back does not require any special legal documentation while a repo generally requires a master agreement to be in place between the buyer and seller.
A buy/sell back is the equivalent of a reverse repo [3].
In ukraine repo transaction is able between financial and credit institutions (nbu, commercial banks, investment companies etc.) And participants of the financial market (nbu, commercial banks, investment companies, financial organizations, private persons, participants of a stock market).
Thus, if an agreement is concluded between bank and a client a repo transaction for a bank will be a credit transaction in economical matter. Bank gives his client an indicated amount of money on a determined period of time getting collateral securities. At the same time bank gets a payment in the form of variation in prices (a price of selling and a price of buying) or as an interest on a value of securities. A risk of a securities' devaluation totally lays upon a client because he will buy these securities out on a beforehand fixed price, not on a market price. In case, if a client cannot buy securities out because of some reasons present credit risk reduces at the cost of a loan guarantee by collateral securities [7].
Repurchase agreements can be used as an instrument of a monetary and credit policy. The earliest experiments of using it took place in the usa in the 20th. Its regular application began in canada since 1953 and in the usa since the 60th. Since the 70th central banks of germany, italy, the netherlands has been starting to use repo transactions in their monetary and credit policy.
In ukraine nbu can carry out transactions of repo and reverse repo with banks for a regulation of banking system liquidity according to the main current positions.
Banks that need a support of their short-term liquidity can make a request to nbu about carrying out repo transactions. If there are a superfluous liquidity in a banking system and monetary aggregates increase faster than needed nbu can sell its own government securities (treasury bills, nbu's certificates of deposit, municipal bonds etc.) By using a reverse repo.
Purchase and sale of government securities during repo and reverse repo transactions occur on the market or balance price (if there is no an active stock market).
Repo rates are used for a setting upper limit of a short-term interest rate corridor on the interbank credit market. Lower limit is set by using a reverse repo rate [1, p.23].
Nbu can carry out transactions in the open market of purchase and sale of government securities by a direct arrangement with banks or by holding a tender of bank's requests for a participation in repo transactions. Banks give their requests to the department of monetary policy of nbu. In these requests they propose their conditions about price of purchase and sale of government securities. During a tender nbu selects those bank's requests, which suit it best because of their price factors (cheaper for purchase and more expensive for sale) or nbu needs to have concrete government securities in its securities portfolio. After a tender banks that have got a right on a purchase and sale of government securities are sent nbu's notifications of confirmation about an intention to make a contract of repo and reverse repo transactions.
Depending on a maturity nbu can carry out such repo and reverse repo transactions:
a) Overnight repo, which refers to a one-day maturity transaction;
b) Term repo, which refers to a repo with a specified end date, a fixed rate, and is liquid;
c) Open repo, which simply has no end date. The rates are variable or set daily; they roll or terminate at the request of either party.
It is necessary to notice that sold securities because of repo transaction are not charged off from a bank statement and acquired securities because of a reverse repo are not taken into account in a bank statement during the term of agreement.
Repurchase agreement is not represented in an accounting of securities seller, because it does not fall under determination of professional activity at the equity market. It does not foresee the sale of securities to the third persons,
Because securities' passing of property happens only between two sides.
Securities, used in repo transaction, are not represented in a general delivery securities' buyer's balance on securities' accounts, because their salesman is still the owner of these securities. Thus, from economic point of view repurchase agreement is a transaction of crediting, not purchase, and consequently, it is taken into account as a loan but not as an asset (securities) [7].
Conclusions. Repurchase agreements play an important role in the nbu's implementation of monetary policy. Repurchase agreements are used to manage the quantity of reserves in the banking system on a shortterm basis. By undertaking such transactions with primary dealers, the nbu can temporarily increase or decrease bank reserves. Repo transactions, carrying out by central banks, in contrast to outright sales and purchases in open market:
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