Direct lending, in all its varieties, is far from always beneficial. In some cases, it will be more effective to use other methods to improve the financial condition, one of which is repo transactions. This is such a special system of buying and selling, under which a prerequisite is set: the seller will redeem the previously sold goods, whatever they may be. Unlike collateral, with this approach for a short period, all rights of use are transferred directly to the buyer (with rare exceptions). Only when the reverse operation is carried out, the full use of the repo object will be returned to the original owner. Such transactions have a rather long history, and, taking into account the peculiarities of such an approach, the legislation only relatively recently developed a more or less clear and adequate position on this issue.
History
For the first time, something similar to repurchase transactions arose back in 1917 in the United States of America. The reason was the very high taxes raised in connection with the hostilities. It has become extremely difficult and very disadvantageous to use pre-existing credit systems. There was a need to come up with something new, more effective. REPO is an abbreviation for the English words repurchase agreement, which translates roughly as a “sales agreement”. The first to use the system was the Federal Reserve Fund, that is, a conditionally state organization. Initially, this was done in order to ensure high-quality and successful lending to the banking system. Gradually, the benefits of this approach became clear to other companies and firms. And until the Second World War and the Great Depression, such deals became more and more popular. Then the economic situation changed, and the need for such instruments simply disappeared for about 30 years. Repo transactions became relevant only in 1950 and since then have again spread around the world, gaining popularity again. In particular, it was computers, communications, and everything connected with this that became another impetus for the further development of the financial instrument.
Goals
Some believe that repos are an option to buy or sell a property. In fact, the main objective of such an operation is short-term lending in exchange for property of approximately the same value (both tangible and intangible). It should be noted that in many situations the price of the object of the transaction at the beginning of its execution is somewhat lower than in the end. That is, for example, there is a stock that costs 10,000 rubles. The company sells this security and receives 10 thousand for it. Since REPO provides for mandatory subsequent repurchase, then after some time it will be necessary to complete the reverse operation. But by the time of its implementation, it may turn out that now this action is already worth 15 thousand. As a result, the company will have to return not 10, but 15 thousand rubles. The interest of both parties is quite obvious. So, the borrower very quickly receives the required amount, and the lender for a relatively short period of time receives a significant profit. Naturally, as in any other financial situation, risks are always possible, which in this case will be higher than in more stable and understandable lending operations. But the income earned is worth it.
REPO Object
A stock repo transaction is the most common, profitable, simple and popular. Initially, it was understood that such operations would be carried out exclusively with securities. Nevertheless, as the system developed, it became clear that, by analogy, you can work with any other goods or products. The meaning of such operations is absolutely the same, but the main feature is a more complex paperwork. For example, to re-register ownership in the framework of repos for a security, you will need to spend a small amount of time. But to carry out the same operation with goods, products, equipment or real estate, you will have to deal specifically with the problem, which may require considerable effort and take more time.
Features and Benefits
Briefly about what the borrower and the lender receive, it was described above. But given the fact that it is mutually beneficial cooperation that is the basis for concluding any direct REPO transaction (as well as any other financial arrangements), this issue should be addressed in more detail. So, the creditor (that is, the person who acquires the object) is interested in just such an approach, because he becomes a full-fledged owner of the property. In the case of classical lending, the ownership right would still remain with the borrower, which in some cases is extremely unprofitable (especially when the benefit will be greater, the shorter the time for the sale of goods). For example, if a creditor for some reason refused to buy back its former property, the other party can quickly and simply, as a full owner, sell the goods and make a profit. There will be no need to wait, arrange court proceedings, resort to bankruptcy proceedings, and so on. It should be noted that for the very fact of the transaction, only the value of the object of the contract is important, and not what financial condition the borrower is currently in. That is, you may not be at all interested in the person to whom the money is given if it offers a liquid object and can confirm the right to own it. As a result, the procedure itself is greatly simplified and accelerated. The same feature is beneficial for the second borrower. No matter how bad his finances are, if there are liquid securities (or other similar goods), he can get money, and you won’t have to spend a lot of time or effort for this.
Promotions and votes
There is another feature that is inherent only in such an operation as a repo transaction. An example is this: a company sells shares it owns. The actual owner of the securities is the creditor, but he does not receive dividends - they are considered the property of the previous owner until the moment when he refuses to buy out the repo object. At the same time, the votes given by the shares already belong to the lender, which can become a problem in some situations. Many companies prefer simultaneously with the transaction to draw up a power of attorney agreement so as not to lose the right to vote. Naturally, all this depends on the relationship of both parties, the features of their work and many other factors.
Taxes
There is another important and very interesting feature that distinguishes repo transactions. This is a tax payment. In particular, many of the options for such buying and selling operations that relate specifically to issued securities are much more profitable than others. For example, in a conventional transaction, one would have to pay a tax for the fact of the transaction. But in the case of repos, an option is being considered in which payment is made exclusively for the difference between the initial price of a share (or other similar security) and its final value. This is much more profitable than with another system. It should be noted that this concerns not only securities, but also those types of transactions that have been completed successfully. That is, the shares were bought back, but did not remain in the ownership of the creditor. It should also be borne in mind that the maximum period should not exceed 6 months.
Classification for tax accounting
One of the basic problems that arise when it is necessary to use just such a taxation system is the need to clearly classify the transaction and its object. That is, you need to clearly understand whether a particular transaction is a simple purchase or sale of a security, or is it a repo-type lending system. Actually, the requirements and conditions of such an operation were described above. The term is not more than 6 months, the object is one and the same relating to the issued securities. There are only two parties to the transaction, and they do not change, and so on. Only if the procedure meets all the requirements will it be possible to provide a preferential tax system. It should be noted that the law allows a slight extension, but no more than until the end of the current period. For example, if the transaction term ends on December 10, then you can extend it until the end of the month, but no more.
REPO transactions with the Central Bank
The Bank of Russia currently uses these types of operations solely to provide liquidity. He acts only as a buyer, purchasing securities from credit organizations. No other parties are considered as market participants. Among other things, it should be borne in mind that in order to take advantage of the opportunities indicated above, credit organizations must comply with the requirements declared by the Central Bank. Otherwise, no one will work with them either. Accounting for repos in banks implies three types of discounts - the lower, initial or upper level. You need to understand that at a 100% initial discount, the stock will not be accepted as collateral.
Mechanism and parameters
REPO transactions with the Bank of Russia are carried out in two ways. The first involves an auction, the second - a fixed cost. Bidding is held weekly to transfer funds for 1 week. Separately, additional auctions can be held that are already focused on loans for up to 6 days. Time intervals, assessment of the adequacy of applications, amounts and other factors of transactions are determined only by the Bank of Russia.
REPO transactions: accounting
In contrast to the taxation system, where various features and properties are important, since the amount payable can significantly change, accounting is much simpler. So, all such operations are displayed simply as the purchase or sale of an asset. There are no special features or other non-standard actions here, therefore, according to the standard scheme, it is simply necessary to first reflect the movement of the object of the repurchase agreement in one direction, and then, as it returns, in the other.
Summary
Based on the foregoing, we can conclude that REPO transactions are a fairly simple and understandable lending mechanism. It has a lot of advantages over conventional, more classic systems, but there are some disadvantages. One of them may be considered increased risk, but the most embarrassing is the need to transfer any assets into full ownership. Only really large companies can afford to do this.