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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: repos: general collateral repos: examples

Example of a general collateral repo

* Original Owner   Interim Holder
Day 1    
  £100 million cash  
* Original Owner   Interim Holder
Day 90    
  £101 million cash  

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.

15/4: £60m 8.5% bonds B
A Cash £65m  
Dirty Price of Collateral = [107.5 + (8.5 x 105/360)]/100 x 60m
  = £65.99m
Haircut @ 2%: cash advance = £65.99m/1.02
  = £64.69m rounded to £ 65m payable by B for purchase of securities
13/5: £60m bonds
  Cash £65.2m
Repurchase Price: = £65m x 4% x 28/360 + £65m
  = £65.20m