CFM46340 | Deemed loan relationships: repos: tax rules: debtor and debtor quasi-repos

What are debtor repos and debtor quasi-repos?

A ‘debtor repo’ is a repo from the point of view of the borrower, the company that sells securities as collateral. The cash that this company receives, although legally sales proceeds, equates in substance to a loan.

Like the ‘debtor repo’, a ‘debtor quasi-repo’ is a transaction from the point of view of the borrower. The term covers arrangements that are economically equivalent to standard debtor repos but are on non-standard terms so that they are not within the definition of debtor repo. For instance:

• Under the arrangement, the ‘borrower’ is not the seller of the securities but has the seller’s (original borrower’s) rights and obligations under the repo novated to it, so that it will be entitled or obliged to buy them back. Since the borrower has not sold securities, Condition C of the debtor repo conditions (CFM46250) is not satisfied.

• The arrangement under which the securities are sold provides only for a person other than the borrower to buy them back, with the original borrower at some point paying the other person to assume its obligations under the repo. In that case Conditions D and E of the debtor repo conditions (CFM46350) are not satisfied:

• The arrangement does not entitle or oblige the ‘borrower’ to buy the same or similar securities to those it has sold (Condition D).

• The financial liability initially recorded in the borrower’s accounts will be extinguished not by the repurchase of the securities, but by payments under the contractual arrangement between the borrower and that other person (Condition E).