An Introduction to Repo Markets: (Securities Institute)

The Repo markets have grown dramatically in the past few years because of the need to hedge short positions in the capital and derivatives markets. Virtually all major currency markets in the world now have an established repo market, the facility is also increasingly being used in developing currency markets as well. This book is a practical introduction that focuses on the instruments, applications and risk management techniques essential for this rapidly evolving market. Fully updated to reflect the changes in these markets, the book also includes worked examples and case studies, and new sections on basket and structured finance repo.

Table of Contents:
Foreword xv Preface xvii Preface to First Edition xix About the author xxi 1 Introduction to Repo 1 Importance of repo 3 Market participants 4 The repo instrument 5 Characteristics of repo 5 Classic repo 6 Summary 11 The sell/buy-back 11 Stock lending 13 Other repo products 14 Tri-party repo 15 Hold in custody repo 16 Safe-keeping repo 17 Borrow/Loan versus cash 17 Bonds borrowed/collateral pledged 17 Cross-currency repo 18 Exotic repo structures 19 Selected references 20 2 Market Background 21 Discounting and present value 22 Compounding 22 Discounting 23 Compounding more than once a year 23 Internal rate of return 24 Money market instruments 24 Securities quoted on a yield basis 25 Securities quoted on a discount basis 26 Money market formulae 27 Overview of bond market instruments 29 Definition of a bond 30 Fair pricing of bonds and bond yield 31 The yield curve 33 Theories of the yield curve 34 Bond price/yield relationship 34 Accrued interest 35 Accrual conventions 35 Selected references 36 3 The Mechanics of Repo 37 Uses and economic functions 38 Funding positions 38 Covering short positions 39 Yield enhancement 41 Margin 41 Initial margin 41 Variation margin 43 Other repo mechanics 44 Repo dealing risks 45 Interdependent risks 45 Financial market risks 46 Dealing with risk 49 Selected reference 50 4 Basket Repo, Synthetic Repo and Structured Finance Repo 51 Basket repo 52 Illustration of basket repo trade: Malaysian Government securities 52 Illustration using structured finance securities 55 Synthetic repo via the total return swap 58 Structured funding vehicles: repo conduit 62 Securities repo conduit 62 Selected reference 66 5 The UK Gilt Repo Market 67 Introduction 68 Growth of market 69 Gilt repo and other sterling money markets 70 Impact on the gilt market 72 Market structure 73 Repo and stock lending 73 Market participants: market making in repo 73 Market participants: brokers 74 Market participants: end-users 74 Gilt repo and the yield curve 75 Impact of the yield curve 75 Hedging through repo 75 Patterns of trading 76 Maturities 76 Specials 76 Gilts settlement and CREST 78 CREST settlement 79 CREST reference prices 79 Delivery by value 80 Gilt repo code of best practice 80 Selected references 81 6 Overview of Repo Trading and The Futures Contract Implied Repo Rate 83 Trading approaches 84 Positive yield curve environment 84 Negative yield curve environment 85 Yield curve arbitrage 86 Other spread trades 87 Specials trading 88 Credit intermediation 90 Matched book trading 90 Hedging tools 91 Futures strip 92 Forward rate agreements 93 Interest-rate swaps 94 The implied repo rate and basis trading 95 Contract definition 95 Conversion factors 98 The cheapest-to-deliver bond 99 The implied repo rate 102 Hedging implications 106 Selected references 108 7 Repo and the Yield Curve 109 Zero-coupon rates 110 Discount factors and the discount function 110 Spot and forward rates: boot-strapping from the par yield curve 111 Spot rates and boot-strapping 111 Implied spot and forward rates 112 The Relationship between par, zero and forward rates 121 Exercises and calculations 122 Forward rates: breakeven principle 122 Examples 123 Forward rates and compounding 126 Forward pricing and repo 126 Selected references 126 8 The Global Master Repurchase Agreement 129 TBMA/ICMA Agreement 130 The Global Master Repurchase Agreement 131 Scope 131 Structure 132 Key principles 133 Title transfer 133 Master netting agreement 137 Margin maintenance 140 Negotiation of the GMRA 141 Margin maintenance 142 Failure to deliver 144 Condition precedent 145 Set-off 146 Automatic early termination 146 Product- and counterparty-specific amendments and additional annexes 147 Gilt Repo Legal Agreement 147 Select references 148 9 Accounting, Tax and Regulatory Capital Issues in Repo 149 Accounting, tax and capital issues 150 Accounting 150 Taxation 150 Capital treatment 151 Capital Adequacy Directive 151 CAD treatment for repo 152 Balance sheet implications 153 The Basel II Framework 153 Basel II Framework 154 Exercises 157 Answers to exercises 162 Case study: ABC Bank plc 169 Glossary 181 Appendix A Duration 186 Appendix B Basis Trading and the CTD Bond 188 Appendix C Volatility 190 Abbreviations 192 Index 194

About the Author :
Dr Moorad Choudhry is Head of Treasury at KBC Financial Products in London. He is a Visiting Professor at the Department of Economics, London Metropolitan University, a Visiting Research Fellow at the ICMA Centre, University of Reading, a Senior Fellow at the Centre for Mathematical Trading and Finance, Cass Business School, and a Fellow of the Securities and Investment Institute.