Gilt repos

See Choudhiy (2002) for more information on the repo markets and the United Kingdom gilt repo market. 

With the introduction of the gilt repo market in 1996, IL swap market participants have been able to more efficiently hedge IL swaps with IL and nominal gilts. Since then, the market has developed to a state where GBP50-100 million plus deals are now the norm in the longdated maturities (15-year+). 

This is in addition to the normal daily money market operations, which keep the BoE closely connected to the gilt repo market. The BoE s dealers also carry ont orders on behalf of its cnstomers, primarily other central banks. 

Members of the LSE mnst follow its conduct of business rules. In addition, there are specific rnles that apply to GEMMs. These include the requirement to report all gilt trades to the LSE, except gilt repo and stock loan trades. The LSE pnblishes market trading statistics that include the monthly turnover, by volnme, of gilt transactions. It also publishes the Daily Official List, the list of closing prices for all securities listed on the London market. 

Eorward-dated input, useful for the input of gilt repo. 

The BoE is involved in the repo market as part of its daily operations in the sterling money markets. From the first quarter of 2000 the DMO also used gilt repo as part of its cash management operations on behalf of the government, which are designed to smooth the net daily cash flows between central government and the private sector. ... 

Gilt repo is covered in detail in chapter 6 of Moorad Choudhry, The Repo Handbook (Oxford Butterworth-Heinemann, 2002). 

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. 

Volume figures from ISMA. Several Bank of England reports have studied the impact of gilt repo, but note particularly the Quarterly Bulletin for February 1998, August 1998 and February 1999. 

The Bank of England discourages sell/buybacks in gilt repo and it is unusual, if not unheard of, to observe them in this market. However, we use these terms of trade for comparison purposes with the classic repo example given in the previous section. The procedure and the terms of the trade would be identical in other markets such as Italy and Portugal where sell/buyback trades are the norm. In the Italian market for example, sell/buybacks are actually called repos. ... 

The repo market in linkers coexists alongside an old-style stocklending system. Issues seldom stray far from general collateral rates. Index-linked gilts are not strippable, and there is no index-linked futures contract. There is a sterling inflation derivatives market, which... 

In certain circumstances a specific issue will go tight in the repo market, meaning that it is difficult to borrow the stock for delivery into short sales. This is typically reflected in the stock going special in the repo market. On rare occasions the stock may become undeliverable, leading to failed transactions and also failure to deliver into the equivalent gilt futures contract. When this happens the DMO may make the stock available for borrowing, out of official portfolios, or issue a small amount of the stock into the market. 

After the close of business each day the DMO publishes reference prices and the equivalent gross redemption yields for each gilt on its news screens. The final reference price is based on closing two-way prices supplied by each GEMM at the end of the day. The prices, previously referred to as CGO reference prices but now following the merger of the CGO with CREST, called DMO or gilt reference prices, are frequently used in the calculation of settlement proceeds in repo and stock loan transactions. 

We consider first a classic repo in the United Kingdom gilt market between two market counterparties, in the 5.75% Treasury 2009 gilt stock. The terms of the trade are given in Exhibit 10.3 and illustrated in Exhibit 10.4. Note that the terms of a classic repo trade are identical, irrespective of which market the deal is taking place in. So the basic trade, illustrated in Exhibit 10.3, would be recognisable for bond repo in European and Asian markets. 

We illustrate a stock loan where the transaction is stock-driven. Let us assume that a securities house has a requirement to borrow a UK gilt, the 5.75% 2009, for a one-week period. This is the stock from our earlier classic repo and sell/buyback examples. We presume the requirement is to cover a short position in the stock, although there are other reasons why the securities house may wish to borrow the stock. The bond that it is offering as collateral is another gilt, the 6.50% Treasury 2003. The stock lender, who we may assume is an institutional investor such as a pension fund, but may as likely be another securities house or a bank, requires a margin of 5% as well as a fee of 20 basis points. The transaction is summarised in Exhibit 10.12. 

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. 

Let s illustrate variation margin as it is applied to during the term of a trade. Exhibit 10.18 shows a 60-day repo in the 5% Treasury 2004, a UK gilt, where a margin of 2% is taken. The repo rate is 5V2%. The start of the trade is 5 January 2000. The clean price of the gilt is 95.25. 

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