Repo Rate and Delivery Cost

Directly copied from Kaplan,

  1. If collateral is physically delivered, then the repo rate will be lower.

If the repo is held by the borrower’s bank, the rate will be higher.

  1. The borrower is required to physically deliver the collateral to the lender. Physically delivery can be costly however.

The collateral is deposited in a custodial account at the borrower’s clearing bank. This is a cost-effective way to reduce the fees associated with delivery.

My question: the first statements are talking about the repo rate and the second ones are based on the delivery costs. Do they mean the repo rate and delivery cost have negative correlation?

Thank you!

I would think so.

Thanks! If so, why the higher the delivery cost the lower the repo rate? At first, I thought if the delivery cost is higher, the rate firms want to charge is higher, right? How do these two connect with each other?

huh? they aren’t directly connected at all. S2000 just means it like ya most likely probably based on decision x.

The cost you pay to deliver let’s say a bear to your custodian doesn’t have a direct relationship with the repo rate because the lender could give a flying F* what you paid. All they care about is where the darn bear at?!?!

Of course if it’s a million dollars to transport a bear to the lender’s bank you are going to be like F* NO you can’t have my bear! So you go to your bank to drop off the bear for a lower cost right? Well the lender increases repo rate now, which creates an indirect link to delivery cost and repo rates. But now you gotta consider if that increase in repo rate is worth the $ money you saved dropping off Yogi at your bank. What would if repo went up $200K and your bank charged $900k to take in Yogi Bear?

#WWYD

If you get your mortgage by flying to the bank president’s ski chalet and asking for it you might get a lower rate, and it will cost more, but that’s not a mechanism. It just happens to be.

Great to know! Clear now! Thanks all for the help!