private repurchase agreement (repo) ธุรกรรมการขายโดยมี

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Private REPURCHASE AGREEMENT (REPO)

ธุรกรรมการขายโดยมสีัญญาวาจะซื้อคนืภาคเอกชน

29 October 2007

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TOPICS

Session 1

1. Definition

2. Background & Objectives

3. BOT run REPO VS Bilateral Repo

4. Characteristics of Private Repo

5. Private Repo in offshore market

6. Benefit of Bond Repo

1. Definition

2. Background & Objectives

3. BOT run REPO VS Bilateral Repo

4. Characteristics of Private Repo

5. Private Repo in offshore market

6. Benefit of Bond Repo

3

TOPICS

Session 2

1. Market Convention for Private Repo

2. Private Repo VS Buy and Sell back

1. Market Convention for Private Repo

2. Private Repo VS Buy and Sell back

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Definition*

• Market in which securities are exchanged for cash with an agreement to repurchase at the predetermined date in the future.

• Securities most commonly used as collateral are sovereign debt instruments.

• Transactions can be of any maturity, but are generally of a short maturity, ranging from overnight to one year.

LenderStart Date Borrower

Cash

Securities / Collateral

LenderMaturity Date

Borrower

Securities / Collateral

Cash + Repo Interest

*Market Research and Development Team, Financial Markets and Reserve Management Department, Bank of Thailand

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Background *

• Began in 1998 when bond market was activated by the massive issuance of government bond for Financial Institutions Development Fund (FIDF) indemnification.

• The mechanism will allow one party to temporarily exchange cash for securities and the other to temporarily exchange securities for cash.

• Legal transfer of securities for the duration of the contract provides protection against credit risk.

• Mechanism to make the bond market a new investment alternative and then an efficient source of funding.


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Objectives *

1. To facilitate bond market development.

• Adding liquidity to bond market

• Encouraging investment in bonds as investors can use bond as collateral to obtain cash if needed.

• Stimulating the financial institutions to be active market makers through short selling.

• Enhancing yield of the bondholders by lending it out

2. To broaden money market structure and to add on an instrument to the market toward collateralized term loan instead of clean loan.

3. To act as channel of central bank open market operations.

4. To be used as an alternative hedging instrument.


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BOT run REPO

Central Bank

BorrowerLender

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Bilateral Repo

Central Bank

Authorized Repo Primary Dealers

Lending

Borrowing

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Private Repo

Authorized Repo Primary DealersLending

Borrowing

Financial Institution

Corporate and Retail

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List of REPO Primary Dealer

1. Bangkok Bank PLC.

2. Kasikornbank PLC.

3. Siam Commercial Bank PLC.

4. Standard Chartered Bank (Thai) PLC.

5. Government Saving Bank

6. United Overseas Bank (Thai) PLC.

7. Hongkong And Shanghai Banking Corp., Ltd.

8. Deutsche Bank Ag.

9. Krung Thai Bank PLC.

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BOT-run repo market

All dayOnly one session in the morning from 9.15 am to 9.45 am

1. Morning session :9.30 am to 10.30 pm

2. Afternoon session :15.30 pm to 16.30 pm

4. Trading Session

Mutually agreed between counterparties

Mainly 1 days as it represents Policy Rate**

1, 7, 14 days 1 ,3 and 6 months

3. Maturity

BOT expect PDs to bridge the liquidity from bilateral repo

BOT actively adjust market liquidity or stability

As a matchmaker 2. Role of the BOT

Private SectorOnly Primary Dealers

Commercial Banks, Finance companies, FIDF and State En’ with MOF permission

1. Participants

Private Repo marketBilateral repo marketBOT-run market

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BOT-run repo market (Cont.)

Standard Master agreement (GMRA)

BOT’s RegulationBOT’s Regulation6. Agreement

Mutually agreed between counterparties but generally use the same securities as stated in BOT repo market

Same as stated in BOT repo market

Government’s securities, Central’s bank securities, State-en with MOF or endorsed by the specific law under BOT’s consent

5. Collateral • Eligible securities

Private Repo marketBilateral repo marketBOT-run market


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What is RepoWhat is Repo

Although legally a sequential pair of trades, a repo

is essentially a short-term interest-bearing loan

against collateral

With the underlying bond to be the collateral, Repo

is more secured than common money market

instruments

Flexible tenor and good liquidity

Although legally a sequential pair of trades, a repo

is essentially a short-term interest-bearing loan

against collateral

With the underlying bond to be the collateral, Repo

is more secured than common money market

instruments

Flexible tenor and good liquidity

Characteristic

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• Despite of using credit line to control counter party’s

credit risk, daily mark to market is another mechanism

to immediately reflect counter parity’s default risk

• Overnight repo rate normally runs slightly below the

Overnight Rate

• By rolling repos, investors can keep surplus funds

invested without losing liquidity or incurring price risk

• Despite of using credit line to control counter party’s

credit risk, daily mark to market is another mechanism

to immediately reflect counter parity’s default risk

• Overnight repo rate normally runs slightly below the

Overnight Rate

• By rolling repos, investors can keep surplus funds

invested without losing liquidity or incurring price risk

Characteristic

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For Money Market InvestorsIn order of ascending yield

In order of descending credit

For Money Market InvestorsIn order of ascending yield

In order of descending credit

Pricing / Credit

10 Days Repo10 Days Repo Inter-bank Inter-bank 10 Days B/E10 Days B/E< <

Gov’t Bonds + Specific Dealer’s CreditGov’t Bonds + Specific Dealer’s Credit

Specific Bank’s CreditSpecific Bank’s Credit

Specific B/E Issuing by Company’s CreditSpecific B/E Issuing by Company’s Credit

>

>


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Repo Market in U.S.Repo Market in U.S.

25% 29% 35% 43% 41% 44% 54% 66% 71% 80%19% 22%27%

34% 32% 33%40%

49%51%

56%

3,7213,575

3,2052,9682,967

3,2813,3563,4573,4603,307

0%

20%

40%

60%

80%

100%

120%

140%

160%

1995 1996 1997 1998 1999 2000 *2001 2002 2003 2004.030

500

1000

1500

2000

2500

3000

3500

4000

RS

RP

Treasury Securities

U.S. Government Securities DealersU.S. Government Securities Dealers’’ RP & RS Average Daily RP & RS Average Daily Outstanding as a % of U.S. Treasury Securities OutstandingOutstanding as a % of U.S. Treasury Securities Outstanding

* Corporate securities are included from July 2001.Figures cover financing involving government, federal agency, and federal agency MBS securities.Source: Federal Reserve Bank of New York and U.S. Treasury

$ Billion

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Repo Market in U.S.Repo Market in U.S.

Lehman BrothersLehman BrothersBear SternsBear Sterns

19.19

503.55

117.49

133.55

In Billionas Nov.30

2006

100%

2,889%

320.20%

575.02%

As % of Total

Equity

3.81%

100%

23.33%

26.52%

As % of Total

Assets

12.13

350.43

38.84

69.75

In Billion as Nov.30

2006

100%3.46%Total Equity

2,624%100%Total Assets

612.3%11.08%RS (Asset)

695.9%19.90%RP (Liability)

As % of Total

Equity

As % of Total

Assets

ClassificationClassification

Position of Investment BanksPosition of Investment Banks

Source: Annual reports of Merrill Lynch and Lehman Brothers

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The Benefits of Bond RepoThe Benefits of Bond Repo

Use repo / reverse repo to manage the

aggregate reserves of the banking

system

Nowadays repo has become major

instruments for government to execute

the monetary policy

Use repo / reverse repo to manage the

aggregate reserves of the banking

system

Nowadays repo has become major

instruments for government to execute

the monetary policy

For Central Bank For Central Bank

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To manage their liquidity

To finance their inventories on a

continuing basis

To speculate in various ways Go short treasury bonds by creating a bigger

RS position than RP

Simply earn spreads between RP and RS

Create tenor mismatch between RP and RS

To manage their liquidity

To finance their inventories on a

continuing basis

To speculate in various ways Go short treasury bonds by creating a bigger

RS position than RP

Simply earn spreads between RP and RS

Create tenor mismatch between RP and RS

For Bond DealersFor Bond Dealers

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Banks sometimes buy repo as an

alternative to unsecured interbank

lending

They also often enter into repo with

dealers to meet immediate funding

needs

Banks sometimes buy repo as an

alternative to unsecured interbank

lending

They also often enter into repo with

dealers to meet immediate funding

needs

For Commercial Banks For Commercial Banks

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Money funds, large corporations, state

and local governments, and foreign

central banks are big repo money

suppliers

Insurance companies often enter into

reverse repo transactions to meet

immediate funding needs

Money funds, large corporations, state

and local governments, and foreign

central banks are big repo money

suppliers

Insurance companies often enter into

reverse repo transactions to meet

immediate funding needs

For Other Financial InstitutionsFor Other Financial Institutions

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Bond funds allocate their assets to repo ,

which is deemed to be cash prepared for

redemption purposes

With acceptable credit risk, overnight

repos provide higher yield than 3-month

Treasury bills

Bond funds allocate their assets to repo ,

which is deemed to be cash prepared for

redemption purposes

With acceptable credit risk, overnight

repos provide higher yield than 3-month

Treasury bills

For Other Financial InstitutionsFor Other Financial Institutions

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RepoRepo to the Whole Bond Marketto the Whole Bond Market

Standard repo agreement supported by

industry / government

Efficient fund transfer, clearing system

supported by central bank

Effective intraday overdraft line supported by

banks and central bank

More liberal pricing / credit control mechanism

Standard repo agreement supported by

industry / government

Efficient fund transfer, clearing system

supported by central bank

Effective intraday overdraft line supported by

banks and central bank

More liberal pricing / credit control mechanism

Key Successful Factors for Key Successful Factors for RepoRepo MarketMarket

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RepoRepo to the Whole Bond Marketto the Whole Bond Market

A Golden Equation for A Golden Equation for RepoRepo to the Whole Bond Marketto the Whole Bond Market

Foundation Stone for the Whole Bond MarketFoundation Stone for the Whole Bond Market

A Successful Repo MarketA Successful Repo Market

Broaden Market Participation Broaden Market Participation

Less Liquidity / Funding IssueLess Liquidity / Funding Issue

High Secondary Market turnover of Government Bond High Secondary Market turnover of Government Bond

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BREAK

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DEFINITION

Repo Rate = Interest on Deposit

Repo Term = Duration of RP agreement (mostly days)

Initial Margin = Hair cut

Margin Threshold = Level of price tolerance or credit line

Purchase Price = Deposit amount

Repurchase Price = Original Deposit + Interest

Required Securities Value = Number of collateral that need to be maintained

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FLOW

KGI DepositorGovernment Securities

Deposit

Deposit amount calculation

( Gross price x # units ) / ( 1 + Initial Margin )

** Use TBMA “RP reference yield” of trade date with Settlement Date + 2 to calculate market value of collateral ** (www.thaibma.or.th)

Settlement Date

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29 30

FLOW (cont.)

Margin Maintenance** ( Market Value < Required Securities value ) Required Securities Value

= ( Purchase price + Accrued repo interest ) x ( 1 + Initial margin ) +,- settled cash margin

or Original deposit x RP rate(%) x days / 365 x ( 1 + Initial margin ) +,- settled cash margin

Market Value

= Gross Price calculated from average bidding yield of primary dealers shown in TBMA report on 16.30

** Monitor by TSD **

KGI DepositorCash/Securities deliver to TSD before 11.00 am

Inform KGI at 8.30 am

TSDKGI inform Depositor

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Threshold = 10Price movement

85

90

95

100

105

110

115

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

Date

Pric

e

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FLOW (cont.)

Margin Maintenance ( Market Value > Required Securities value )Required Securities Value

= ( Purchase Price + Accrued repo Interest ) X ( 1+ Initial Margin ) +,- settled cash margin

or Original Loan x RP rate(%) x days / 365 X ( 1 + Initial Margin ) +,- settled cash margin

Market Value

= Gross Price calculated from average bidding yield of primary dealers shown in TBMA report on 16.30 (add cash collateral and cumulative interest on cash margin, if any)

** Monitor by TSD **

KGI Depositor

Cash/Securities deliver to TSD before 11.00 am

Inform KGI at 8.30 am

TSDKGI inform Depositor

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FLOW (cont.)

Interest on Cash Margin

= Σ(Cash collateral x Rate announced by TSD x ( 1 / 365 )

** Interest will be calculated daily but not compounded **

Interim payment of Cash Margin Interest

• Interest on cash margin have to be delivered at the last day of the month but not including the last date.

KGI DepositorEnd of month interest on cash margin

End of month interest on cash margin

TSD

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FLOW (cont.)

KGI DepositorCollateral

Principal plus REPO interest

Scenario 1 There’s no cash collateral during REPO period

Maturity Date

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FLOW (cont.)

KGI DepositorCollateral

Principal plus REPO interest

Scenario 2 There’s cash collateral during REPO period

1. Collateral and Principal (including REPO interest) settlement

Maturity Date

2. Interest on cash collateral

KGI DepositorCash Margin plus Interest on Cash margin

TSDCash Margin plus Interest on Cash margin

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FLOW (cont.)

BASKET TRANSACTION• Use more than 1 underlying assets as collateral.

Margin (Maintenance)• Net Margin within Basket

• If the net margin exceed threshold => call/deliver margin

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EXAMPLE

EXAMPLE :

Bank A use Bond A 100,000 units and Bond B 100,000 units as collateral to borrow THB 195 million from Bank B with threshold of THB 1 million.

Bond A 100,000 units

Bond B 100,000 units

BASKET

Borrower

THB 195 million

Lender

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EXAMPLE (cont.)

Market Value > Required Securities Value by THB 1.5 million (Threshold = 1 million)Component in the Basket

Bond A Margin Exposure = THB 900,000

Bond B Margin Exposure = THB 600,000

Total = THB 1.5 million

• Margin exposure for each collateral is not over THRESHOLD.

• However, total exposure in the basket has exceeded THRESHOLD.

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EXAMPLE (cont.)

• Depositor has to deliver THB 1.5 million for margin.

*** If maturity date for RP transaction doesn’t fall on the same date, cash margin plus interest from matured transaction will bring over to the last RP transaction.***

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3. TAX

2. Margin Maintenance

1. Transaction

Item

Tax on capital gain is waived. Lender is still responsible for tax on interest earned from Private Repo transaction.

Both parties have to responsible for capital gains tax from buy & sell back transaction.

Both parties have obligation to monitor market movement and obligated to provide margin if price movement is greater than preset up threshold.

None

In general, Investors have to sign Master Agreement (i.e. GMRA) before entering any transactions. However, KGI made it easier for investors with a more workable Thai version agreement.

Easy to enter with no prerequisite agreement only buy and sell Transaction confirmation.

Private RepoBuy & Sell back

Comparison of Buy & Sell back VS Private Repo

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Buyer (non default party) has full right on fully or over –collateral securities.

Non default party doesn’t have right on (so-called) collateral since they have the obligation to settle the transaction accordingly.

4. Right on collateral in case of default.

Both parties (if agreed) have right to early terminate transaction.

Early Termination is non applicable5. Liquidity

6. Accounting entry

Item

Under Private Repo, lender put it as Loan to xxx from Private Repo (ลูกหนี้ตามสัญญาซั้อคืน).

Collateral has to put as company’s asset.

Private RepoBuy & Sell back

Comparison of Buy & Sell back VS Private Repo

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Deposit Guarantee Insurance

1 millionFifth Year

10 millionFourth Year

25 millionThird Year

50 millionSecond Year

Full amountFirst Year

Setting up of the Deposit insurance companyFirst 6 month

Guarantee sizePeriod

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THANK YOU

Atachai Virojtecha

02-231-1111 Ext. 695

[email protected]

private repurchase agreement (repo) ธุรกรรมการขายโดยมี

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