AN INTRODUCTION TO REPO MARKETS

The Repo markets have grown dramatically in the past few years because of the need to hedge short positions in the capital and derivatives markets. Virtually all major currency markets in the world now have an established repo market, the facility is also increasingly being used in developing currency markets as well.
This book is a practical introduction that focuses on the instruments, applications and risk management techniques essential for this rapidly evolving market. Fully updated to reflect the changes in these markets, the book also includes worked examples and case studies, and new sections on basket and structured finance repo.

Dr Moorad Choudhry is Head of Treasury at KBC Financial Products in London. He is a Visiting Professor at the Department of Economics, London Metropolitan University, a Visiting Research Fellow at the ICMA Centre, University of Reading, a Senior Fellow at the Centre for Mathematical Trading and Finance, Cass Business School, and a Fellow of the Securities and Investment Institute.

Foreword.
Preface.
Preface to First Edition.
About the author.
1. INTRODUCTION TO REPO.
Importance of repo.
Market participants.
The repo instrument.
Characteristics of repo.
Classic repo.
Summary.
The sell/buy-back.
Stock lending.
Other repo products.
Tri-party repo.
Hold in custody repo.
Safe-keeping repo.
Borrow/Loan versus cash.
Bonds borrowed/collateral pledged.
Cross-currency repo.
Exotic repo structures.
Selected references.
2. MARKET BACKGROUND.
Discounting and present value.
Compounding.
Discounting.
Compounding more than once a year.
Internal rate of return.
Money market instruments.
Securities quoted on a yield basis.
Securities quoted on a discount basis.
Money market formulae.
Overview of bond market instruments.
Definition of a bond.
Fair pricing of bonds and bond yield.
The yield curve.
Theories of the yield curve.
Bond price/yield relationship.
Accrued interest.
Accrual conventions.
Selected references.
3. THE MECHANICS OF REPO.
Uses and economic functions.
Funding positions.
Covering short positions.
Yield enhancement.
Margin.
Initial margin.
Variation margin.
Other repo mechanics.
Repo dealing risks.
Interdependent risks.
Financial market risks.
Dealing with risk.
Selected reference.
4. BASKET REPO, SYNTHETIC REPO AND STRUCTURED FINANCE REPO.
Basket repo.
Illustration of basket repo trade: Malaysian Government securities.
Illustration using structured finance securities.
Synthetic repo via the total return swap.
Structured funding vehicles: repo conduit.
Securities repo conduit.
Selected reference.
5. THE UK GILT REPO MARKET.
Introduction.
Growth of market.
Gilt repo and other sterling money markets.
Impact on the gilt market.
Market structure.
Repo and stock lending.
Market participants: market making in repo.
Market participants: brokers.
Market participants: end-users.
Gilt repo and the yield curve.
Impact of the yield curve.
Hedging through repo.
Patterns of trading.
Maturities.
Specials.
Gilts settlement and CREST.
CREST settlement.
CREST reference prices.
Delivery by value.
Gilt repo code of best practice.
Selected references.
6. OVERVIEW OF REPO TRADING AND THE FUTURES CONTRACT IMPLIED REPO RATE.
Trading approaches.
Positive yield curve environment.
Negative yield curve environment.
Yield curve arbitrage.
Other spread trades.
Specials trading.
Credit intermediation.
Matched book trading.
Hedging tools.
Futures strip.
Forward rate agreements.
Interest-rate swaps.
The implied repo rate and basis trading.
Contract definition.
Conversion factors.
The cheapest-to-deliver bond.
The implied repo rate.
Hedging implications.
Selected references.
7. REPO AND THE YIELD CURVE.
Zero-coupon rates.
Discount factors and the discount function.
Spot and forward rates: boot-strapping from the par yield curve.
Spot rates and boot-strapping.
Implied spot and forward rates.
The Relationship between par, zero and forward rates.
Exercises and calculations.
Forward rates: breakeven principle.
Examples.
Forward rates and compounding.
Forward pricing and repo.
Selected references.
8. THE GLOBAL MASTER REPURCHASE AGREEMENT.
TBMA/ICMA Agreement.
The Global Master Repurchase Agreement.
Scope.
Structure.
Key principles.
Title transfer.
Master netting agreement.
Margin maintenance.
Negotiation of the GMRA.
Margin maintenance.
Failure to deliver.
Condition precedent.
Set-off.
Automatic early termination.
Product- and counterparty-specific amendments and additional annexes.
Gilt Repo Legal Agreement.
Select references.
9. ACCOUNTING, TAX AND REGULATORY CAPITAL ISSUES IN REPO.
Accounting, tax and capital issues.
Accounting.
Taxation.
Capital treatment.
Capital Adequacy Directive.
CAD treatment for repo.
Balance sheet implications.
The Basel II Framework.
Basel II Framework.
Exercises.
Answers to exercises.
Case study: ABC Bank plc.
Glossary.
Appendix A: Duration.
Appendix B: Basis Trading and the CTD Bond.
Appendix C: Volatility.
Abbreviations.
Index.