CFM46120 | Deemed loan relationships: repos: general collateral repos: examples

Example of a general collateral repo

You can see that the repurchase price is £1m, or 1%, greater than the sales price. 1% for 90 days equates to approximately 4% p.a. on a simple basis. The transaction is in substance a lending one.

Extended example of a standard repo

A (repo seller) enters into repo with B (repo buyer). 1st leg settlement is on 15/4 and the repo is for 28 days (term is on 13/5). The repo rate is 4% and collateral is £60m nominal 8.5% bond with annual coupons payable on 31/12. Clean price of the bond is 107.5 on 15/4. A haircut of 2% is required. The sale and repurchase prices are calculated below.

15 April

• £60 million 8.5% bonds -B

• Cash £65 million - A

Dirty Price of Collateral = (107.5 + (8.5 x105/360))/100 x 60 million = £65.99 million

Haircut @ 2%: cash advance = £65.99 million /1.02 = £64.69 million rounded to £65 million by B for purchase of securities.

13 May

• £60 million bonds

• Cash £65. 2 million

Repurchase Price = £65 million x 4% x 28/360 + £65 million = £65.20 million