i was working on the fixed income material last night and i was thining i can spit out some info on repos for the exam but i dont really know what they are (real life wise) can someone give me a 2-3 line plain language expanation, or just comment of the following, -its my understanding that, you have money lender who takes will loan you money, and then dependent on the collateral (liquid/special/how delivered…) they will determine a rate to charge you on the lent money? -what is the collateral (securities, cash…)
Our firm uses repo’s to park cash overnight, and receive the overnight repo rate. It’s a little better than the Rfr, but not much. Basically all extra cash is swept into an account and invested in the repos. we receive treasuries or agency securities for collateral. We lend the bank our extra cash wich is added to their requred reserves, we get the overnight repor rate for this loan, which is backed by their colateral. The bank we loan to is the borrower of these funds. I’ve never seen an overnight repo issued by anyone other than a bank (maybe it happens, but I don’t think so) I believe the reason they issue repos is to secure cash for their required reserves. We lend the money in order to get a very small spread above the Rfr on our excess cash.
The bank I used to regulate would post agency MBS or Treasuries as collateral on their repos.
The banks I used to regulate would post agency MBS or Treasuries as collateral on their repos.
also remember that the characteristics of the repo collateral affect the repo rate. credit risk of borrower - more risky, higher repo rate term of repo - longer term, higher repo rate scarcity of collateral (hot issues) - limited availability, lower repo rate as lenders would be willing to accept a lower repo rate to obtain a security they need quality of collateral - higher quality collateral, lower repo rate delivery of collateral - actual physical delivery, lower repo rate fed funds rate - higher fed fund rate, higher repo rate