Repo rates

Choudhry, M., 2005. An alternative bond relative value measure determining a fair value of the swap spread using libor and gc repo rates. J. Asset Manag. 7 (1), 17-21. 

The fitted spot curve can differ considerably if yields on short-term repo are included. The effect is shown in Figure 5.7, which is reproduced from Anderson and Sleath (1999). Note that this is a short-term spot curve only the maturity extends out to only 2 years. Two curves have been estimated the cubic spline-based yield curve using the repo rate and without the repo rate. The curve that uses repo data generates a curve that is much closer to the money market yield curve than the one that does not. The only impact is at the very short end. After about 1 year, both approaches generate very similar curves. 

FIGURE 5.7 Fitting short-term yield curves using government repo rates. (Reproduced with permission from the Bank of England Quarterly Bulletin, November 1999.)... 

For an account of the impact of special repo rates on term structure modelling see Barone and Risa (1994) and Duffie (1993), which are available from the respective institution Web sites. 

Barone, E., Risa, S., 1994. Valuation of Floaters and Options on Floaters Under Special Repo Rates. Institute Mobiliare Italiano, Rome. 

Duffie, D., 1993. Special Repo Rates. Stanford University, Graduate School of Business, Stanford, CA. 

A special repo rate is below the general repo rate. The repo market is described in Chapter 10. 

There will be two parties to a repo trade, let us say Bank A (the seller of securities) and Bank B (the buyer of securities). On the trade date the two banks enter into an agreement whereby on a set date, the value or settlement date Bank A will sell to Bank B a nominal amount of securities in exchange for cash. The price received for the securities is the market price of the stock on the value date. The agreement also demands that on the termination date Bank B will sell identical stock back to Bank A at the previously agreed price consequently. Bank B will have its cash returned with interest at the agreed repo rate. 

In essence a repo agreement is a secured loan (or collateralised loan) in which the repo rate reflects the interest charged on the cash being lent. 

A sell/buyback is a spot sale and forward repurchase of bonds transacted simultaneously, and the repo rate is not explicit, but is implied in the forward price. Any coupon payments during the term are paid to the seller however, this is done through incorporation into the forward price, so the seller will not receive it immediately, but on termination. This is a disadvantage when compared to classic repo. However there will be compensation payable if a coupon is not handed over straight away, usually at... 

If there is a coupon payment during a sell/buyback trade and it is not paid over to the seller until termination, a compensating amount is also payable on the coupon amonnt, usually at the trade s repo rate. When cal-... 

Sale and repurchase Bid at repo rate bid for stock, lend the cash... 

Offer at repo rate offer the stock, take... 

Outright sale forward buyback Repo rate implicit in forward buyback price... 

On termination, ABC returns the cash received at the start, together with interest charged at the repo rate. 

The net gain to ABC is based on the difference between the repo rate paid to XYZ and the rate earned on the cash placed on deposit. 

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. 

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. 

EXHIBtT 10.21 Societe Generale French Government Repo Rates on Bloomberg, as at 6 August 2001... 

Spanish government repo rates are posted on numerous vendors including Bloomberg and Reuters rates can be viewed on Bloomberg page CIMD and Reuters page CIMF among others. 

EXHIBIT 10.23 The Specific Repo Rate Spread to the GC Rate for the DBR 3.75% January 2009 Bond, 1999-2000... 

January 2009 bond, the 10-year benchmark and also the cheap-est-to-deliver (CTD) issue for the March 1999 Bund contract. However, it was not the CTD bond after expiry of June 1999 contract, and the extent of specialness declined after this point. Interestingly, this bond remained in the delivery basket for subsequent contracts and its special status fluctuated. Arbitrage traders, who wish to exploit the repo rate differential between benchmark and off-the-run issues and GC and special stocks, are active participants in the Bund repo market. 

EXHIBIT 10.24 German Government Two- and Five-Year Collateral, Repo Rates on Garban ICAP Screen, 9 January 2001... 

Exhibit 10.27 shows bid-offer repo rates for specific Italian government collateral on a typical broker screen. The dealing size is also indicated, so for instance the December 2001 CCT issue is bid at 4.72% and offered at 4.65%, both up to 25 million. Not all issues have a two-way price posted. 

EXHIBIT 10.27 Repo Rates for Specific Italian Government Collateral, Garban ICAP Screen on 9 January 2001... 

---