Cash-rich institutions

The development and use of repo in each country to an extent dictates the nature and range of market participants. In a mature market repo counterparties include investors and cash-rich institutions, those seeking to finance asset positions and their intermediaries. Some firms will cross over these broad boundaries and engage in all aspects of repo trading. The main market parties are ... 

This is part of the general collateral (GC) market, and is more common in the United States than elsewhere. Consider the case of a cash-rich institution investing in GC as an alternative to deposits or commercial paper. The better the quality of collateral, the lower the yield the institution can expect, while the mechanics of settlement may also affect the repo rate. The most secure procedure is to take physical possession of the collateral. However, if the dealer needs one or more substitutions during the term of the trade, the settlement costs involved may make the trade unworkable for one or both parties. Therefore, the dealer may offer to hold the securities in his own custody against the investor s cash. This is known as a hold-in-custody (HIC) repo. The advantage of this trade is that since securities do not physically move, no settlement charges are incurred. However, this carries some risk for the investor because they only have the dealer s word that their cash is indeed fully collateralised in the event of default. Thus this type of trade is sometime referred to as a Trust Me repo it is also referred to as a due-bill repo or a letter repo. 

Financial institutions will engage in both repo and reverse repo trades. Investors also, despite their generic name, will be involved in both repo and reverse repo. Their money market funds will be cash-rich and engage in investment trades at the same time they will run large fixed interest portfolios, the returns for which can be enhanced through trading in repo. Central banks are major players in repo markets and use repo as part of daily liquidity or open market operations and as a tool of monetary policy. 

In the case of a bonds borrowed/collateral pledged trade the institution lending the bonds does not want or need to receive cash against them, as it is already cash rich and would only have to reinvest any further cash generated. As such this transaction only occurs with special collateral. The dealer borrows the special bonds and pledges securities of similar quality and value (general collateral). The dealer builds in a fee payable to the lending institution as an incentive to do the trade. 

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