“the more difficult it is to obtain the securities, lower the repo rate”.
Should not it be the other way? higher?
The security is in high demand, so offering it as collateral lowers the cost to borrow money.
Think of it as you are the one who owns the scarce security (its so much in demand that even lenders want to have it also) and you have to use it as collateral to a lender. Does he charge you more or less? He cahrges you a lower repo rate so that he can have access that security.
I know you are worried about liqudity but the point here is scarcity.
For securities lending firm, they will be very happy if they get some unobtainable stock. Many hedge fund will use very expensive price to buy it.
[quote=“CFA300”]
Think of it as you are the one who owns the scarce security (its so much in demand that even lenders want to have it also) and you have to use it as collateral to a lender. Does he charge you more or less? He cahrges you a lower repo rate so that he can have access that security.
Ok. I have it and put it up as a collateral to the lender. What is the high demand has to do with it? What is the lender to do with the security- what difference does it make whether it’s in high demand or not?
when something is in high demand - and you put it up as collateral - and borrow against it - and say you decide to renege on returning the money you borrowed. Since the counterparty has it as collateral, and it is in high demand - he can sell that collateral, and recoup his money - without any issues. Under those circumstances - he can afford to lend you the money at a lower rate.