What is REPO? Currency REPO transaction

Liquidity of a bank is the ability of a financial institution to fully fulfill all obligations, clearly adhering to the deadlines. To maintain liquidity standards at the appropriate level, credit institutions are actively attracting material resources from a variety of sources. And they can be not only internal, but also external. The source of funds on the domestic market of the state is the Central Bank of Russia. He is responsible for the liquidity of the entire banking system. It's time to ask yourself what repos are, because this particular transaction acts in this situation as the main refinancing instrument.

REPO: Definition

REPO in English sounds like a repurchase agreement. This is a transaction that consists of two parts: the purchase of securities and their further sale at the agreed time and at a specified cost. Repo operations can be compared with lending, which is secured by securities issued to the lender. The cost of the loan itself, or a discount, is the difference between the initial cost of selling and buying securities. When studying the question, what is REPO, it is necessary to take into account the two-sided nature of this mechanism.

Features of transactions

The main advantage of the mechanism of repo transactions is a high reliability index. One can note the availability and technical simplicity of the operation. The price of credit funds, which are provided under repo transactions, is minimal. This is due to the almost total absence of risks. If due to objective circumstances it is not possible to implement the second part of the arrangement, for example, the borrowing organization does not have the opportunity to buy back securities, the creditor becomes the owner of securities on legal grounds.

Characteristics of transactions

In order to understand what a repo is, consider the main characteristics and parameters of this category of transactions. You can distinguish:

• The term transaction.
• Type or composition of collateral.
• Discount.

Depending on the duration of these transactions are:

• Intraday, also known as overnight. They are concluded for no more than a day.
• Urgent, which have a fixed maturity.
• Open, for which the maturity is not established.

In a situation where the first part of the agreement has already been executed, and the term for the implementation of the second part of the transaction has not yet expired, REPO is called current. When the first part of the agreement is executed and when the second part of the transaction is open, REPO is called open. For fixed-term operations and overnight, a fixed rate is typical. For open positions, a floating rate is used.

Consider, for example, Russia, what is REPO. The Central Bank of Russia provides funds for REPO for a period of 1 and 7 days, 3 and 12 months. Transactions of 3 months and a year are not carried out systematically. For their implementation, an individual decision of the Central Bank is necessary. Hence the conclusion that repo operations are just a short-term source of liquidity.

REPO transactions in foreign currency in the commercial segment

The repo operation is often held between the CBR, which is a creditor, on the one hand, and a commercial bank that takes on the role of a borrower, on the other. In transactions, two commercial banks can participate simultaneously. The size of rates in this situation is determined solely on the basis of rates of the interbank market. They are attached to the terms of lending and to the quality of the securities themselves. A REPO transaction in foreign currency between credit institutions and the Central Bank can be conducted on the Moscow Stock Exchange, on the St. Petersburg Stock Exchange, within the structure of Bloomberg. To be eligible to participate in the auction, financial institutions must comply with a number of criteria that are set by the Central Bank. As security, securities that are included in the Lombard List can appear in all transactions with the Central Bank. They are considered to be highly reliable and liquid. The full pawn list of papers is published every day in an updated form on the official website of the regulator.

Which securities are not accepted as collateral?

As security, the Central Bank accepts only securities that meet certain requirements. As a deposit can not act:

• Papers issued by the bank itself, which is the second participant in the transaction.
• Papers issued by any financial institution that has any partnership with a bank acting as a borrower under a repo transaction.
• Bonds with a maturity of less than 2 days.

For each category of securities, the Central Bank of the Russian Federation, based on the duration of the REPO, establishes the primary, maximum and minimum price levels, discounts. The discount acts in this situation as the difference between the purchase price and the price of the redemption of securities. With the help of the primary discount, the amount of funds that the CBR provides to the credit organization under the first part of the agreement is determined. The maximum and minimum price levels are used to calculate the current discount for the entire term of the repo operation.

Liquidity supply direction: auctions

To ensure the liquidity of the entire banking system through the use of repo transactions, the Central Bank of Russia practices two main directions. Let's start with the conclusion of agreements based on the repo auction. This direction of liquidity is characterized by the presence of a limit on the funds provided within the auction. The direction depends on the situation that exists in the Russian currency market and the availability of a minimum interest rate. Each of the participants of the auction has the right to submit an application, where it is obliged to indicate the REPO rate, which can be either higher or equal to the minimum. Information on the results of the auction is published on the website of the Central Bank of Russia. Thus, REPO auction enables potential borrowers to compete for favorable conditions of partnership with the Central Bank of Russia.

Fixed rates

The direction of partnerships on the basis of fixed rates allows the Central Bank to attract material resources only for a day. The transaction is called overnight. The rate is given on fixed terms, and at the same time it is an order of magnitude higher than the minimum. This category of partnership arrangements is implemented on a daily basis.

Over the past few years, the amount of capital that is attracted by credit institutions in REPO auctions is systematically increasing. This signals that it is the repo mechanism in foreign currency that currently acts as the dominant instrument of liquidity of the domestic banking system, which is used to refinance the financial segment.

Disadvantages of the legislative system

In accordance with the Civil Code of the Russian Federation, currency REPO is not classified as a separate category of transactions. At the level of legislation, a partnership is perceived as the commission of two transactions at one time (purchase and sale) or as the provision of borrowed funds for a certain type of collateral.

There are precedents in history when the repo was declared invalid. It concealed the fact of secured crediting. Once the transaction was declared invalid, REPO itself lost all its advantages over the standard loan scheme. In the court proceedings, the emphasis was placed on the fact that the contract for the repurchase of property clearly indicated that this property itself was a direct pledge.

Main difficulties with REPO transactions

Considering the question of what a repo is, one can say that from a formal point of view this is a simple aggregate of sales transactions. In fact, the mechanism is used to temporarily provide funds with the assignment of rights to a certain property for some time. The decisions of the court are mainly determined by the fact that the currency REPO has a striking similarity with the pledge, therefore, it is so. As a result of this discrepancy between reality and legislative standards, currency REPO is not allowed into a wide civil turnover. The situation requires considerable legal adjustment. It is problematic to understand at the level of the arbitration court on the question of what repo is. The Central Bank, while practicing the partnership scheme, but the risks of its implementation in the aspect of non-fulfillment by the parties of their obligations remain very high.