Collateral In Repurchase Agreements

In a billing board due, the security (cash) pledged by the borrower is not actually delivered to the treasurer. On the contrary, it is placed by the borrower, for the lender for the duration of the trading, on an internal account („in deposit“). This has become less common with the growth of the repo market, in particular due to the creation of centralized counterparties. Because of the high risk to the taker, these are usually settled only with large financially stable institutions. Sometimes banks or merchants have to recover a security sold as part of a deposit. To do this, they replace something else of equivalent value – usually a similar security – to keep the pension agreement itself intact. Replacement security then becomes a security for the repo. Members of FICC`s Government Services Division use their GSD terminal link or the RTTM Web Front End to access the GSD automated collateral replacement facility. Since most repo-trades are „blinded“ by repo-brokers, which means that both parts of the transaction do not know the identity of the other party, the broker must first obtain the necessary information from the sale party in the trade. The broker then has up to 11 a.m EST to submit a replacement notice providing information on repo-trading to be replaced, including initial security and other aspects of trading. As soon as GSD receives this surrogate message, release instructions are automatically created to obtain the original guarantees of the reverse part and return them to the vendor distributor. At this stage of the process, GSD should only know that a substitution is planned and that the initial guarantees have been returned.

He doesn`t need to know exactly what the substitute will be. Instead, GSD replaces general guarantees for any replacement allowance that may not arrive on time, allowing it to support the contract until effective replacement guarantees are available. The distinguishing feature of a tripartite body is that a deposit bank or an international clearing organization, tripartite representatives, acts as an intermediary between the two parties to the „Repo“.