What is a Repo?

A repurchase agreement, commonly referred to as “repo,” is a financial instrument serving as
a crucial mechanism for liquidity management and collateralized borrowing. They are
employed by various institutions, including banks, hedge funds, and other financial entities as
short-term borrowing instruments. It involves the sale of securities with a commitment to
repurchase them at a specified future date and price. This transaction facilitates immediate
liquidity for the seller on a short-term basis while providing the buyer with a low-risk investment
secured by collateral, as such making it a secured investment.
A repurchase agreement typically consists of two primary transactions: the initial sale of the
securities and the subsequent repurchase.
Repo Transactions can be structured in various ways, and any asset that is capable of being
transferred from one person to another may be subject to repo. The most common types of
assets that are repo’d are debt securities (bonds), equity securities (shares) and other
financial assets such as loans and commodities.
A “reverse repo” occurs when the situations are reversed—the buyer of the securities agrees
to sell them back to the seller at a predetermined price.
Both repo and reverse repos are utilised in managing liquidity in financial markets and play a
pivotal role in the operations of central banks, money market funds, and other financial
institutions.
If the seller defaults during the life of the repo, the buyer (as the new owner) can sell the asset
to a third party to offset its loss. The asset therefore acts as collateral and mitigates the credit
risk that the buyer takes on the seller.

What is the purpose of The Global Master Repurchase Agreement (GMRA)

The GMRA was developed by the International Capital Market Association (ICMA) to
standardize the terms of repos globally. The GMRA serves as a comprehensive legal
framework designed to govern repo transactions in a consistent manner across jurisdictions.
One of the significant legal advantages of the GMRA is its capacity to facilitate netting
allowing for the offset of claims and liabilities resulting from multiple transactions. This feature
enhances the credit risk profile of participants by limiting their exposure. Further a GMRA will
usually stipulate that in the event of a default, the buyer has the right to liquidate the
collateral to cover any losses, thus providing a layer of protection against credit risk.
The enforceability of the GMRA can vary based on jurisdiction, and understanding local
variations and restrictions is paramount. For instance, repurchase agreements may be
treated distinctly under local insolvency laws, impacting the rights of parties in the event of
default. Commercially, the repo market is influenced by various factors, including interest
rates, economic conditions, and regulatory changes. Currently, with monetary tightening
observed in many jurisdictions, there has been increased scrutiny on collateral eligibility and
the types of assets that can be transacted. Market professionals need to maintain consistent
due diligence and oversight to align their repo strategies with prevailing conditions.

Current market trends

The market for repos is expanding in Europe and the US and there are rapid emergences of
relatively small repo markets in China. There are differences in the way that repo works in
Europe compared with the US, and between the structure and operation of the two markets.
In Europe, repo transfers legal title to collateral from the seller to the buyer by means of an
outright sale. Under New York law (the predominant jurisdiction for US repos), transferring title
to collateral is not straightforward. As such, collateral is pledged but exempted from certain
provisions of the US Bankruptcy Code that normally apply to pledges, particularly the
automatic stay on enforcement of collateral in the event of insolvency. Further unlike in
traditional pledges, the pledgee/buyer in a US repo is given a general right of use of
collateral.

Repos and the GMRA are instrumental in the financial services landscape, providing essential
avenues for effective liquidity management.

Mount Street has significant experience of the repo market, both in Europe and the US, and
provides best in class services to both lenders and borrowers in connection with their repo
transactions. The growing need for liquidity amid the macroeconomic uncertainties our
clients are experiencing has led to a significant increase in activity in the repo market,
particularly over the past 12 months. Mount Street remains dedicated to working closely with
our clients to ensure that our services meet the evolving financial landscape and effectively
address the uncertainties and challenges that lenders and borrowers face in today’s market.