Equity repo market

This is the open market in gilt repo. A market in equity repo, for instance, had heen in operation in the London market from around 1992. 

This carries on to bank organisation structure. In most banks, the repo desk for bonds is situated in the money markets area, while in others it will be part of the bond division (the author has experience of banks employing each system). Equity repo is often situated as part of the back office settlement or Treasury function. Bank of England, Quarterly Bulletin, February 1997. 

The margin level of repo varies from 0-2% for collateral such as UK gilts or German Bunds, to 5% for cross-currency and equity repo, to 10-35% for emerging market debt repo. 

There is a wide range of uses to which repo might be put. Structured transactions that are very similar to repo include total return swaps, and other structured repo trades include floating-rate repo that contains an option to switch to a fixed rate at a later date. In the equity market repo is often conducted in a basket of stocks, which might be constituent stocks in an index such as the FTSEIOO or CAC40 or user-specified bas-... 

Market makers generally are able to finance their long bond and equity positions at a lower interest cost if they repo out the assets equally they are able to cover short positions. 

The classic repo is the instrument encountered in the United States, United Kingdom, and other markets. In a classic repo one party will enter into a contract to sell securities, simultaneously agreeing to purchase them back at a specified future date and price. The securities can be bonds or equities but also money market instruments such as T-bills. The buyer of the securities is handing over cash, which on the termination of the trade will be returned to them and on which they will receive interest. 

A rise in interest rates increases the value of most call options. For stock options, this is because the equity markets view a rate increase as a sign that share price growth will accelerate. Generally, the relationship is the same for bond options. Not always, however, since in the bond market, rising rates tend to depress prices, because they lower the present value of future cash flows. A rise in interest rates has the opposite effect on put options, causing their value to drop. The risk-free interest rate applicable to a bond option with a term to expiry of, say, three months is a three-month government rate—commonly the government bond repo rate for bond options, usually the T-bill rate for other types. 

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