Why Use Repo Agreements

Despite regulatory changes over the past decade, there are still systemic risks to the repo space. The Fed continues to worry about a default by a major repo trader that could cause a fire sale among money market funds, which could then have a negative impact on the overall market. The future of the pension space may involve ongoing regulations to limit the actions of these transactors, or even a shift to a central clearing-house system. For now, however, repurchase agreements remain an important means of facilitating short-term borrowing. This “eligible collateral profile” allows the repo buyer to define their risk appetite in relation to the collateral they are willing to hold against their money. For example, a repo buyer reluctant to take in repo securities may only want to hold “current” government bonds as collateral. In case of liquidation of the pension seller, the guarantee is very liquid, which allows the buyer of the pension to sell the guarantee quickly. A less risk-averse repo buyer may be willing to take bonds or non-investment grade shares as collateral, which may be less liquid and may experience higher price volatility in the event of a repo seller default, making it more difficult for the repo buyer to sell the collateral and get their money back. Tripartite agents are able to offer sophisticated warranty rights filters that allow the repo buyer to create these “eligible collateral profiles” that can systematically generate collateral pools that reflect the buyer`s risk appetite.

[13] Cornell Law School. `Counterparty credit risk of repo transactions, eligible margin loans and OTC derivative contracts.` (accessed August 14, 2020).