Can Securities Lending Transactions Substitute For Repurchase Agreement Transactions

Since Tri-Party agents manage the equivalent of hundreds of billions of dollars in global collateral, they are the size to subscribe to multiple data streams to maximize the coverage universe. Under a tripartite agreement, the three parties to the agreement, the tri-party agent, the collateral taker/cash provider (“CAP”) and the repo seller (Cash Borrower/Collateral Provider, “COP”) agree to a collateral management agreement that includes a “collateral eligible profile”. In particular, Party B acts as a cash lender in a repo, while Seller A acts as a cash borrower and uses the collateral as collateral; in a reverse repo (A), is the lender and (B) the borrower. A repo is economically similar to a secured loan in which the buyer (effectively the lender or investor) receives securities as collateral in order to guard against the seller`s default. The party who first sold the securities is effectively the borrower. Many types of institutional investors participate in repo operations, including investment funds and hedge funds. [5] Almost all securities can be used in a repo, although highly liquid securities are preferred because they are easier to sell in the event of default and, more importantly, they can be easily bought on the open market, where the buyer has created a short position in the repo security through a reverse-repo and a sale in the market. For the same reason, illiquid securities are discouraged. The EU UCITS Directive, version V of which entered into force in 2014, sets a limit on the lending of securities. Thus, only 10% of the securities of the same counterparty can be exposed. Counterparty risk is therefore limited for European UCITS ETFs. However, the same directive allows the borrowing of 100% of the securities that make up the ETF.

Taking into account both rules, there would therefore be at least 10 counterparties if all securities were loaned. On the other hand, US legislation only allows lending 50% of the ETF`s securities. In the United States, deposits have been used since 1917, when war taxes made older forms of credit less attractive. Initially, deposits were only used by the Federal Reserve to lend to other banks, but the practice quickly spread to other market participants. The use of Repos expanded in the 1920s, disappeared due to the global economic crisis and World War II, then resumed its expansion in the 1950s and enjoyed rapid growth in the 1970s and 1980s, thanks in part to computer technology. [6] While conventional deposits are generally instruments with credit risk, there are residual credit risks. Although it is essentially a secured transaction, the seller can no longer redeem the securities sold on the maturity date. In other words, the repo seller is no longer in default in his commitment.

Therefore, the buyer can keep the guarantee and liquidate the guarantee to recover the money loaned. However, the security may have lost its value since the beginning of the transaction, as the security is subject to market movements. In order to reduce this risk, deposits are often over-undersured and are subject to a daily market margin (i.e. when assets lose value, a margin call may be triggered to ask the borrower to publish additional securities). . . .