Are Repurchase Agreements Swaps


Are Repurchase Agreements Swaps

Generally speaking, credit risk for real transactions depends on many factors, including the terms of the transaction, the liquidity of the security, the specificities of the counterparties involved and much more. Swaps are generally documented in two forms of standard framework contracts published by the International Exchange and Resolution Association (ISDA), one in 1992 (« the 1992 Isda Framework Agreement ») and the other in 2002 (the « 2002 ISDA Framework Agreement »; an « ISDA Framework Agreement »). Specifically negotiated contractual terms are included in a schedule that often complements and modifies the provisions of an ISDA framework agreement. Each swap transaction is then documented by a confirmation containing the fundamental economic conditions of that transaction. Longer-term deposits are generally considered a higher risk. For a longer period of time, more factors may affect the solvency of the redemption and changes in interest rates have a greater impact on the value of the asset repurchased. Under current EU capital rules, banks must invest less regulatory capital than full return swaps, but this will change and should boost the total return swap market. Under the existing regime, any financial product can be introduced into a repo and the Bank benefits from regulatory capital relief. Brown added, however, that this would likely change when the new Basel Capital Adequacy Accord is adopted in 2005. The new agreement will divide repo agreements into sovereign and non-sovereign OECD agreements. Deposits on government bonds will continue to receive 100% regulatory relief, but others will be treated as secured loans and will benefit from fewer regulatory facilities. One of the main problems with the early termination of a swap or repo transaction is whether the resilient party acted in an « economically reasonable » manner, both to determine the net amounts due upon termination and to liquidate the collateral or repo assets held by the resilient party.

From the buyer`s point of view, a reverse repo is simply the same pension activity, not that of the seller. Therefore, the seller who carries out the transaction would qualify it as a « repo », while in the same transaction, the buyer would qualify it as a « reverse repo ». « Repo » and « Reverse Repo » are therefore exactly the same type of transaction that is only described from opposite angles. The term « reverse repo et sale » is generally used to describe the creation of a short position in a debt instrument in which the buyer immediately sells on the open market the assets provided by the seller. On the date of execution of the repo, the buyer acquires the corresponding title on the open market and delivers it to the seller. In the case of a transaction of this type, the buyer expects the security in question to lose its value between the date of the repo and the date of settlement. The same principle applies to Repos. The longer the duration of the repo, the more likely it is that the value of the guarantees will vary before the redemption and that the activity will affect the buyer`s ability to honour the contract. In fact, counterparties` credit risk is the primary risk of rest. As with any loan, the creditor bears the risk that the debtor will not be able to repay the principal.

. . .