Repo markets as a key pillar in unlocking debt market development. Gemloc Workshop Repo Markets Panel Cairo, March 25, 2010

Transcription

1 Repo markets as a key pillar in unlocking debt market development Gemloc Workshop Repo Markets Panel Cairo, March 25, 2010

2 Table of contents 1. Repo: its ambivalent nature and development challenges 2. The business case and repo users 3. Which type of repos? 4. Legal framework for repos 5. Financial neutrality and certainty of regulations 6. Operational certainty 7. Summing up: standard pre-conditions for repo markets 8. Repo issues for discussion 2

3 1. Repo: its ambivalent nature and development challenges Hybrid nature and uses of Repos on Sovereign debt Reconciles two contradictory dimensions: a secured cash loan and a temporary full transfer of ownership Key as transmission belt between money markets and debt markets Key to reconcile diverse business needs among market participants Multiple dimensions lead to the need of consistency between a broad range of policies and regulations Legal framework reconciling double nature: loan and purchase (tax, accounting, ownership of collateral) Issuance policies and monetary policy operations Investment regulations (liquidity and risk management) Operational framework (contract conventions, settlement rules) Catalytic role in debt market development Liquidity, valuation, transformation of maturities, money market mutual fund development 3

4 2. The business case and repo users Cash takers Fund securities portfolios Lower cost of funding ( as collateralized) Play the yield curve (the steeper the better) Cover short positions (e.g. PDs) Cover settlement fails (cash leg) In some EMEs: only available liquidity source Cash providers Investment: credit risk reduction, capital efficiency, liquidity, invest shorter term Cover settlement fails (securities leg) Securities lending income Other uses CB s monetary policy, liquidity management DMO/MoF liquidity management 4

5 2. The business case and repo users (Cont d) Frequent cash takers Banks, primary dealers Mutual funds to address redemptions (temporary) Frequent cash providers Banks Money market mutual funds Institutional investors for liquidity management (mutual funds, pension funds, insurance, corporations) Retail through deposits backed by Sovereign debt Both sides Central Bank DMO/Ministry of Finance 5

6 3. Which type of repos? Legal Operational Classic repo 1 instrument 1 instrument Undocumented sell/buy-back 2 instruments 2 instruments Documented sell/buy-back (1) 1 instrument 2 instruments (1) Included in 1995 in Annex III of the Global Master Repo Agreement (GMRA) 6

7 3. Which type of repos? repurchase agreement sell/buy-back (documented) Legal transfer of title to Buyer transfer of title to Buyer* Risk/return remains with Seller remains with Seller Accounting like pledged loan like pledged loan Re-collateralisation margin re-pricing* On-payment of coupon immediately to Seller paid to Seller at end* Coupon paid to Buyer paid to Buyer Return on cash repo interest capital gain Quotation Repo Rate Forward Price Contract formalization yes yes Trade reporting Two legs on T Two legs on T Settlement options Automatic sett. of leg 2 Automatic sett. of leg 2 Considerations: Both instruments should be financially equivalent Legal and operational issues are simpler and easier under documented sell/buy back (*) Many markets started with sell/buy backs and evolved into repurchase agreements or maintain both types of contracts 7

8 4. Legal framework for repos Legal frameworks for repos are constantly evolving and may adopt diverse frameworks Legal certainty: repurchase vs. sell/buy backs Re-characterisation risk (margins, substitutions, coupons) Close out netting in insolvency Legal agreement Legal status: law, regulation, MRA? Compulsory or voluntary? Multi-lateral or bilateral? International compatibility Which entity to endorse the legal agreement and supervise the repo market? CB, Securities Regulator? 8

9 5. Financial neutrality and certainty of regulations Tax opinion (as loan) WHT on underlying securities No WHT on the on-payment of the coupon to Seller Purchase & repurchase should not be disposals for tax Treatment of all repo return as interest (included in forward leg) Accounting IFRS standards (as loan) Prudential regulations Cash reserve and liquidity ratio Only on repos with clients in some countries Not on interbank repos 9

10 6. Operational certainty Operational rules and market organization: Eligible participants and securities Rules for delayed or failed settlement Reporting Market oversight The need for a coordinated approach: CB, DMO, Regulator (banks, securities, pensions, insurance) C&S arrangements for repos (prioritization) Registry of both spot and forward legs Automatic settlement of forward leg Flexibility in settlement cycle (T+0 onwards) Collateral management facilities 10

11 7. Summing up: standard pre-conditions for repo markets Existing business case: broad and diversified range of users Liquid collateral and price transparency Legal certainty: collateral ownership Financial neutrality and certainty of regulations: tax, accounting, prudential, reserve requirements Operational certainty: agreed rules Post-trade certainty: formalized settlement 11

12 8. Repo issues for discussion 1. What is the business case driving repos in your country and what is the impact on secondary market liquidity? Central Bank operations, interbank trades,maturity transformation, securities portfolio funding, secured funding from clients Supporting or restraining secondary maket liquidity 2. Sequencing repo market development and public sector intervention Role of the Central Bank in repo market development Role of repo pre-conditions in your market Minimum activity in unsecured money market (active liquidity management) Basic framework ensuring legal certainty and tax neutrality 12

13 8. Repo issues for discussion (Cont d) 3. How important is a standard operational framework for your repo market? Legal agreement: bilateral vs. multilateral and voluntary vs. compulsory C&S framework to settle repos 4. What is your experience in addressing specific issues that are a challenge in many developing markets? Valuation of collateral, price sources, margin calls Minimum standard haircuts or pure bilateral arrangements? Limits on eligible collateral for repos? Risk of not returning collateral? Reserve requirements? 13