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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: repos: what is a repo?

What is a repo?

Most repos are two party agreements under which one party sells securities to another for cash, and repurchases the same or equivalent securities at a later date. The first party is known as the ‘borrower’ if a company and the ‘original owner’ if an income tax payer; the second as the ‘lender’ if a company and the ‘interim holder’ if an income tax payer. As most repos are entered into by companies, the terms ‘borrower’ and ‘lender’ are generally used in this guidance.

The repurchase price will normally be equal to the

  • original sale price (which will be just below the market value of the securities), plus
  • an increment equivalent to interest on a loan of the same amount for the period of the repo.

Collateral securities may be adjusted in response to movements in their market value. This practice (known as ‘margining’) is explained at CFM46110.

The borrower under a repo is normally a company possessing securities that wishes to borrow cash. The fact that the lender holds the securities as collateral for the loan means that the borrower can borrow more cheaply. Hence this type of repo is often known as a ‘general collateral’ repo. It is described in more detail at CFM46110.

A ‘special collateral’ repo is less common. It is an alternative to, and often economically identical to, a stock loan collateralised by cash. It is driven by the desire of a person to possess particular securities for a limited period of time, perhaps to settle a short sale.

There is a very large repo market in gilt-edged securities. The Bank of England is the biggest participant in this market and uses it to control liquidity in the financial system (buying large numbers of gilts when it wants to increase it and selling them when it wants to reduce it). The Bank also uses this market to set interest rates: what is commonly known as the Bank of England base rate is officially known as its repo rate, and is the rate at which the Bank trades in the market.

The Bond Market Association and International Securities Market Association documentation

Most repos take place using standard documentation. In Europe the standard agreement is the GMRA (Global Master Repurchase Agreement) published jointly by The Bond Market Association and the International Securities Market Association (now part of the Securities Industry and Financial Markets Association and the International Capital Market Association respectively). In the US the standard agreement is the SIFMA Master Repurchase Agreement. The parties to these agreements may adapt their terms to suit individual trades.