Private REPURCHASE AGREEMENT (REPO)
Private REPURCHASE AGREEMENT (REPO)
ธุรกรรมการขายโดยมีสญญาวาจะซื้อคืนภาคเอกชน
29 October 2007
TOPICS
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Session 1
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TOPICS
Session 2
Definition*
• Market in which securities are exchanged for cash with an agreement to repurchase at the predetermined date in the future.
• Securities most commonly used as collateral are sovereign debt instruments.
• Transactions can be of any maturity, but are generally of a short maturity, ranging from overnight to one year.
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Start Date
Cash
Borrower
Lender
Securities / Collateral
Maturity Date
Securities / Collateral
Borrower
Lender
Cash + Repo Interest
*Market Research and Development Team, Financial Markets and Reserve Management Department, Bank of Thailand
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Background *
• Began in 1998 when bond market was activated by the massive issuance of government bond for Financial Institutions Development Fund (FIDF) indemnification.
• The mechanism will allow one party to temporarily exchange cash for securities and the other to temporarily exchange securities for cash.
• Legal transfer of securities for the duration of the contract provides protection against credit risk.
• Mechanism to make the bond market a new investment alternative and then an efficient source of funding.
*Market Research and Development Team, Financial Markets and Reserve Management Department, Bank of Thailand
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Objectives *
1. To facilitate bond market development.
• Adding liquidity to bond market
• Encouraging investment in bonds as investors can use bond as collateral to obtain cash if needed.
• Stimulating the financial institutions to be active market makers through short selling.
• Enhancing yield of the bondholders by lending it out
2. To broaden money market structure and to add on an instrument to the market toward collateralized term loan instead of clean loan.
3. To act as channel of central bank open market operations.
4. To be used as an alternative hedging instrument.
*Market Research and Development Team, Financial Markets and Reserve Management Department, Bank of Thailand
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BOT run REPO Bilateral Repo
Central Bank
Lender
Central Borrower
Bank
Lending
Borrowing
Authorized Repo Primary Dealers
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Authorized Repo Primary Dealers
Private Repo
Financial Institution
Lending Borrowing
List of REPO Primary Dealer
1. Bangkok Bank PLC.
2. Kasikornbank PLC.
3. Siam Commercial Bank PLC.
4. Standard Chartered Bank (Thai) PLC.
5. Government Saving Bank
6. United Overseas Bank (Thai) PLC.
7. Hongkong And Shanghai Banking Corp., Ltd.
8. Deutsche Bank Ag.
9. Krung Thai Bank PLC.
Corporate and Retail
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BOT-run repo market BOT-run repo market (Cont.)
BOT-run market | Bilateral repo market | Private Repo market | |
1. Participants | Commercial Banks, Finance companies, FIDF and State En’ with MOF permission | Only Primary Dealers | Private Sector |
2. Role of the BOT | As a matchmaker | BOT actively adjust market liquidity or stability | BOT expect PDs to bridge the liquidity from bilateral repo |
3. Maturity | 1, 7, 14 days 1 ,3 and 6 months | Mainly 1 days as it represents Policy Rate** | Mutually agreed between counterparties |
4. Trading Session | 1. Morning session : 9.30 am to 10.30 pm 2. Afternoon session : 15.30 pm to 16.30 pm | Only one session in the morning from 9.15 am to 9.45 am | All day |
BOT-run market | Bilateral repo market | Private Repo market | |
5. Collateral • Eligible securities | Government’s securities, Central’s bank securities, State-en with MOF or endorsed by the specific law under BOT’s consent | Same as stated in BOT repo market | Mutually agreed between counterparties but generally use the same securities as stated in BOT repo market |
6. Agreement | BOT’s Regulation | BOT’s Regulation | Standard Master agreement (GMRA) |
*Market Research and Development Team, Financial Markets and Reserve Management Department, Bank of Thailand
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What is Repo What is Repo
Characteristic Characteristic
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Pricing / Credit
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What is Repo
Repo Market in U.S.
U.S. Government Securities Dealers’ RP & RS Average Daily Outstanding as a % of U.S. Treasury Securities Outstanding
10 Days Repo
Inter-bank
10 Days B/E
10 Days B/E
Inter-bank
10 Days Repo
< <
Gov’t Bonds + Specific Dealer’s Credit
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Gov’t Bonds + Specific Dealer’s Credit
Specific Bank’s Credit
>
Specific Bank’s Credit
Specific B/E Issuing by Company’s Credit
>
Specific B/E Issuing by Company’s Credit
* Corporate securities are included from July 2001.
Figures cover financing involving government, federal agency, and federal agency MBS securities. Source: Federal Reserve Bank of New York and U.S. Treasury
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$ Billion
160%
3,575
140%
3,307
3,460 3,457
3,356 3,281
3,205
3,721 4000
3500
120%
RS RP
Treasury Securities
2,967 2,968
3000
56%
100%
2500
49%
51%
80%
40%
2000
60%
34%
32%
33%
1500
27%
40%
19%
22%
80% 1000
66%
71%
20%
43% 41%
44%
54%
500
25%
29%
35%
0%
0
1995 1996 1997 1998 1999 2000 *2001 2002 2003 2004.03
Repo Market in U.S. The Benefits of Bond Repo
Position of Investment Banks
For Central Bank
Classification | Bear Xxxxxx | Xxxxxx Brothers | ||||
In Billion as Nov.30 2006 | As % of Total Assets | As % of Total Equity | In Billion as Nov.30 2006 | As % of Total Assets | As % of Total Equity | |
RP (Liability) | 69.75 | 19.90% | 575.02% | 133.55 | 26.52% | 695.9% |
RS (Asset) | 38.84 | 11.08% | 320.20% | 117.49 | 23.33% | 612.3% |
Total Assets | 350.43 | 100% | 2,889% | 503.55 | 100% | 2,624% |
Total Equity | 12.13 | 3.46% | 100% | 19.19 | 3.81% | 100% |
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The Benefits of Bond Repo The Benefits of Bond Repo
For Bond Dealers
For Commercial Banks
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The Benefits of Bond Repo The Benefits of Bond Repo
For Other Financial Institutions
For Other Financial Institutions
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Repo to the Whole Bond Market
A Successful Repo Market
Broaden Market Participation
Less Liquidity / Funding Issue
Key Successful Factors for Repo Market
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Foundation Stone for the Whole Bond Market
High Secondary Market turnover of Government Bond
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A Successful Repo Market
Less Liquidity / Funding Issue
Broaden Market Participation
High Secondary Market turnover of Government Bond
Foundation Stone for the Whole Bond Market
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Repo to the Whole Bond Market
A Golden Equation for Repo to the Whole Bond Market
DEFINITION
BREAK
Repo Rate = Interest on Deposit
Repo Term = Duration of RP agreement (mostly days) Initial Margin = Hair cut
Margin Threshold = Level of price tolerance or credit line Purchase Price = Deposit amount
Repurchase Price = Original Deposit + Interest
Required Securities Value = Number of collateral that need to be maintained
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Settlement Date
FLOW
KGI
Government Securities
Depositor
Deposit
Deposit amount calculation
( Gross price x # units ) / ( 1 + Initial Margin )
** Use TBMA “RP reference yield” of trade date with Settlement Date + 2 to calculate market value of collateral ** (xxx.xxxxxxx.xx.xx)
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FLOW (cont.)
Margin Maintenance** ( Market Value < Required Securities value )
** Monitor by TSD **
Required Securities Value
= ( Purchase price + Accrued repo interest ) x ( 1 + Initial margin ) +,- settled cash margin or Original deposit x RP rate(%) x days / 365 x ( 1 + Initial margin ) +,- settled cash margin Market Value
= Gross Price calculated from average bidding yield of primary dealers shown in TBMA report on 16.30
Cash/Securities deliver to TSD before 11.00 am
Depositor
TSD
KGI
Inform KGI at 8.30 am
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KGI inform Depositor
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Price movement
Threshold = 10
115
110
105
Price
100
95
90
85
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
Date
31
TSD
Xxxxxxxxx
00
XXX inform Depositor
Inform KGI at 8.30 am
FLOW (cont.)
Margin Maintenance ( Market Value > Required Securities value )
** Monitor by TSD **
Required Securities Value
= ( Purchase Price + Accrued repo Interest ) X ( 1+ Initial Margin ) +,- settled cash margin or Original Loan x RP rate(%) x days / 365 X ( 1 + Initial Margin ) +,- settled cash margin Market Value
= Gross Price calculated from average bidding yield of primary dealers shown in TBMA report on 16.30 (add cash collateral and cumulative interest on cash margin, if any)
Cash/Securities deliver to TSD before 11.00 am
KGI
FLOW (cont.) FLOW (cont.)
Interest on Cash Margin
= Σ(Cash collateral x Rate announced by TSD x ( 1 / 365 )
** Interest will be calculated daily but not compounded ** Interim payment of Cash Margin Interest
• Interest on cash margin have to be delivered at the last day of the month but not including the last date.
End of month interest on cash margin
Maturity Date
Scenario 1 There’s no cash collateral during REPO period
Principal plus REPO interest
Depositor
KGI
Collateral
KGI
TSD
Depositor
End of month interest on cash margin
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FLOW (cont.)
FLOW (cont.)
Maturity Date
Scenario 2 There’s cash collateral during REPO period
1. Collateral and Principal (including REPO interest) settlement
Principal plus REPO interest
Depositor
KGI
Collateral
2. Interest on cash collateral
BASKET TRANSACTION
• Use more than 1 underlying assets as collateral.
Margin (Maintenance)
• Net Margin within Basket
• If the net margin exceed threshold => call/deliver margin
KGI
Cash Margin plus Interest on Cash margin
Depositor
TSD
Cash Margin plus Interest on Cash margin
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EXAMPLE
EXAMPLE :
Bank A use Bond A 100,000 units and Bond B 100,000 units as collateral to borrow THB 195 million from Bank B with threshold of THB 1 million.
EXAMPLE (cont.)
Market Value > Required Securities Value by THB 1.5 million (Threshold = 1 million)
Component in the Basket
Borrower
BASKET
Bond A 100,000 units Bond B 100,000 units
Lender
THB 195 million
Bond A Margin Exposure = THB 900,000 | ||
Bond B Margin Exposure | = | THB 600,000 |
Total | = | THB 1.5 million |
• Margin exposure for each collateral is not over THRESHOLD.
• However, total exposure in the basket has exceeded THRESHOLD.
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EXAMPLE (cont.) Comparison of Buy & Sell back VS Private Repo
Item | Buy & Sell back | Private Repo |
1. Transaction | Easy to enter with no prerequisite agreement only buy and sell Transaction confirmation. | In general, Investors have to sign Master Agreement (i.e. GMRA) before entering any transactions. However, KGI made it easier for investors with a more workable Thai version agreement. |
2. Margin Maintenance | None | Both parties have obligation to monitor market movement and obligated to provide margin if price movement is greater than preset up threshold. |
3. TAX | Both parties have to responsible for capital gains tax from buy & sell back transaction. | Tax on capital gain is waived. Lender is still responsible for tax on interest earned from Private Repo transaction. |
• Depositor has to deliver THB 1.5 million for margin.
*** If maturity date for RP transaction doesn’t fall on the same date, cash margin plus interest from matured transaction will bring over to the last RP transaction.***
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Comparison of Buy & Sell back VS Private Repo Deposit Guarantee Insurance
Item | Buy & Sell back | Private Repo |
4. Right on collateral in case of default. | Non default party doesn’t have right on (so-called) collateral since they have the obligation to settle the transaction accordingly. | Buyer (non default party) has full right on fully or over – collateral securities. |
5. Liquidity | Early Termination is non applicable | Both parties (if agreed) have right to early terminate transaction. |
6. Accounting entry | Collateral has to put as company’s asset. | Under Private Repo, lender put it as Loan to xxx from Private Repo (ลูกหนีตามสัญญาซอั คืน). |
Period | Guarantee size |
First 6 month | Setting up of the Deposit insurance company |
First Year | Full amount |
Second Year | 50 million |
Third Year | 25 million |
Fourth Year | 10 million |
Fifth Year | 1 million |
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THANK YOU
Atachai Virojtecha
00-000-0000 Ext. 695
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