Repo rates reflects delivery requirement. So we know that use of custodian bank for collateral leads to the 2nd highest repo rate among 4 delivery ways (no delivery, custodian bank, wire transfer, physical delivery), all else equal.
In Laredo case MOCK CFAI, Q2, why is this statement correct?
“There are a variey of machenism for transfering securities to the buyer. For example, a custodian bank can take possession of the securities and ensure that both parties’ interests are served. This transactions tends to have a lower cost than other transfer arrangement”.
Intuitively, for the meaning of insurance/protection, custodian bank seems to lower potential ‘costs’. However, does it infact incur more explicit costs? And also from what we relate to Repo topic (1st paragraph above), should it be higher? I know that paragraph refers specifically to repo rates. The ‘transfer arrangement’ here is not wire transfer?
Or, how do we know what they mean by ‘cost’? Confused. Appreciate any clarification! Thanks.
But you have to consider the quality/liquidity of the collateral too. The custodian bank will provide that which is > than an extra couple of days in delivery. Also the custodian bank tailors to what the buyer wants so to that buyer assuming they get the collaterall they want they’ll take a lower rate.
I understand what you meant, about the roles and advantages of a custodian bank. That’s what I thought intuitively too. However, for the context of this question: it’s specific about delivery/transfering. How do you distinguish from 1st paragraph that custodian bank makes repo higher vs wire transfer?
Or … is this case that details (“variey of machenism for transfering securities”) in the question aren’t important?!
ah i see ok. i haven’t gotten to that question yet.
I would still say custodian bank because wire transfer have a transaction/delivery fee. if I had to rank the categories from high to lowest repo rate I would say
Physical Delivery, Wire Transfer, Custodian Bank, No delivery
It’s all CFAI online mocks. Check Laredo and Chung cases.
@AlmostDoneIII, it’s almost there. However, with your ranking, custodian bank has higher rate than wire transfer then? This is inconsistent with the answer that custodian bank involvement leads to lower cost!
depending on the terms and the type of securities, the bank might even pay you interests for holding these securities . While wire transfer is a pure cost inducing transaction
Ah! I think I got it after reading schweser and your post again.
It’s talking only about delivery (having collateral in hand). The different methods and their costs don’t matter (all else equal).
so in that reference physical delivery is cheaper, then wire, then custodial bank, then not having it all. ya book is correct assuming schweser is correct too lol.