REPO transactions can be called a new stage in the development of lending. They are a more convenient and reliable option for such. The subject of operations of this type are usually securities, as they have high liquidity and some other advantages. In some cases, the subject of the transaction may be real estate or other property. In addition, repos can be actively used during exchange trading.
It is worth noting that the necessary amendments to the law on securities (“On the Securities Market”, Federal Law) have already been made that regulate the conduct of such operations. This made them even more reliable and excluded the possibility of conflict situations between the parties.
Definition
REPO transactions are the procedures during which the sale of any valuables is carried out, accompanied by their repurchase after the agreed time at the price fixed during the transaction. A repurchase is mandatory, representing the final (second) stage of the transaction.
The value value on which the parties rely on the first stage of the transaction is usually different from the value according to which the second stage will take place. The difference is possible both up and down. This percentage difference is called the repo rate. In all cases, both costs are fixed at the conclusion of the transaction and do not change subsequently.
Application
The scope of repos is extensive. Being used for the first time at the beginning of the 20th century, now they are enclosed by a huge number of individuals and organizations everywhere. They have become very popular at the interbank level, and can also be concluded by various organizations with banks or other organizations.
There are known examples in which repos were concluded for other purposes. Namely - to obtain a loan, the obligations of which do not relate to credit debt and are not summarized with it at the documentary level. That is, having concluded a number of such transactions, the organization may receive at its disposal a significant amount, but not have credit debt (according to the documents).
In lending
Lending is the main purpose of repos. Such procedures are a convenient alternative to lending under conventional schemes. In fact, the seller takes the money of the buyer for temporary use, selling him the values. At the second stage of the transaction, after a certain time, the seller redeems the same values ​​back, returning ownership of them, and the buyer - his money.
In the event that the seller does not have the amount necessary for the purchase of values, they will remain the property of the buyer. That is why such procedures are considered the most reliable lending option. Their additional advantage is a fixed price, which is set at the time of the transaction and at which the seller will have to buy the values ​​in the second stage.
In exchange business
During exchange trading, some participants are sometimes faced with the need to sell assets that they do not have available. In this case, a repurchase agreement may be concluded with the person at whose disposal the required assets are. From him, the bidder buys these assets and resells them at his discretion, opening a "short" position. As time passes, the "short" position closes, as a result of which the values ​​are returned to the bidder and he returns to their original owner, completing the repo transaction.
The initial owners are usually stock brokers. REPO transactions themselves were initially concluded only with securities, but now it is possible to conduct them in relation to goods and securities, since for brokers such operations are the most convenient way to provide traders with the opportunity to open short positions.
Kinds
There are many options for this procedure. For each group of cases, the parties can choose the most appropriate transaction conditions. The main conditions according to which different types of such transactions can be distinguished are the terms and direction.
The terms mean the time after which the obligations of the second stage of the transaction will have to be fulfilled. Under the direction is the nature of the actions of each of the parties in the first and second stages of the procedure.
Towards
In the direction, such operations can be considered direct or reverse. It depends on the role each of the parties plays in the first stage of the transaction. That is, for one of the parties, the transaction is direct, and for the other, the reverse.
- Direct REPO transactions: the party acts as a seller, undertaking to make a subsequent repurchase of the valued assets.
- Reverse repurchase transactions: the party acts as a buyer, from which the seller agrees to buy back the values ​​in the second stage.
By term
The deadline is the period through which the obligations of the second stage must be fulfilled. On this basis, such transactions may be intraday, derivatives or open.
- Open: differ in that no deadlines are set, only a fixed price is set at which the repurchase of values ​​should be made.
- Urgent: they have a specified deadline for the onset of the second stage, exceeding one day, before the expiration of the term are considered valid.
- Intraday: redemption of values ​​should be made the next day.
Features
One of the features is how the accounting of repo transactions is carried out. Despite the fact that during the procedure the sale is made twice (first by the seller to the buyer, and then back), only the profit that one of the parties receives is taxed due to the difference in the amounts paid for the same assets in the first and second stages of the transaction.
In addition, some of the ambiguities that the parties should have paid attention to were previously repro features. Subsequently, the law on securities was duly supplemented, due to which such ambiguities were eliminated.
Benefits
The main advantage is minimal risk. If one of the parties is unable to fulfill its obligations at the second stage, the other party will have at its disposal either monetary funds or other valuables for exactly the same amount. The only source of danger can be excessively high dynamics of changes in the value of these values. Depending on the situation, this factor can bring both some additional profit and certain losses.
In addition, among the advantages that repurchase transactions have is flexibility of conditions. The parties can choose the time that suits them and agree on a price that will be acceptable to each of them.
For buyer
For the party acting as a buyer at the first stage, the advantage is the possibility of using the acquired values ​​for their own purposes, before the second stage. This process is sometimes called obtaining a loan in securities. Due to this advantage, repos with securities and other assets are so widespread in the exchange business.
If the purpose of the operation is to issue a cash loan, the buyer acts as a creditor. The fact that the values ​​pass into his ownership, serves as insurance in case of default by the borrower of its obligations.
For seller
For the party selling the valuables at the first stage , the advantage is that it is possible to use the received funds at its discretion, before the second stage of the operation occurs. Due to this advantage, this type of procedure has become an excellent alternative to classical lending.
When it comes to issuing a loan in securities, the seller will be a creditor. The transfer of funds at his disposal will serve as insurance in case of non-return of values ​​by the buyer.