ASIFMA–ICMA

Guide on Repo in Asia
August 2015

Section I - ASIFMA
Laying the Policy and Regulatory Foundation for
Efficient Repo Market Development
Section II - ASIFMA and ICMABest Practices across the Repo Trade Lifecycle

Disclaimer
For the avoidance of doubt, the best practices set out in this document are for guidance only and are non-binding.
Individual parties should determine their own conduct in light of the prevailing legal, regulatory and commercial
circumstances and should always satisfy themselves of the appropriateness or otherwise of following the guidelines
set out in this document in any given case.
Given the continued evolution of market practices, material within this Guide on Repo in Asia (Section II – Best
Practices across the Repo Trade Lifecycle) that is drawn from the ICMA ERC Guide to best practice in theEuropean Repo Market may not at all times fully reflect updates to that ICMA ERC Guide (the latest version of whichis available on the ICMA ERC website).
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ASIFMA–ICMA Guide on Repo in Asia

About ASIFMA and ICMA

Asia Securities Industry and Financial Markets (ASIFMA)ASIFMA is an independent, regional trade association with over 80 member firms comprising a diverse rangeof leading financial institutions from both the buy and sell side, including banks, asset managers, law firms
and market infrastructure service providers. Together, we harness the shared interests of the financial industry
to promote the development of liquid, deep and broad capital markets in Asia. ASIFMA advocates stable,
innovative and competitive Asian capital markets that are necessary to support the region’s economic growth.
We drive consensus, advocate solutions and effect change around key issues through the collective strengthand clarity of one industry voice. Our many initiatives include consultations with regulators and exchanges,
development of uniform industry standards, advocacy for enhanced markets through policy papers, and lowering
the cost of doing business in the region. Through the GFMA alliance with SIFMA in the United States and
AFME in Europe, ASIFMA also provides insights on global best practices and standards to benefit the region.  
www.asifma.org

International Capital Markets Association (ICMA)The ICMA represents financial institutions active in the international capital market worldwide and has around 480
members located in 60 countries. ICMA’s market conventions and standards have been the pillars of the international
debt market for almost 50 years, providing the framework of rules governing market practice which facilitate the orderly
functioning of the market. Since the early 1990’s, ICMA has played a significant role in promoting the interests andactivities of the international repo market, and of the product itself. The European Repo Council (ERC), a special interest
group established under the auspices of ICMA, represents the major firms active in Europe’s cross-border repo markets.
www.icmagroup.org

ASIFMA–ICMA Guide on Repo in Asia

3

Contents

Introduction ������������������������������������������������������������������������������������������������������������������ 8
Understanding repurchase agreements and the repurchase market������������������������������������������� 8
Section I - ASIFMA ������������������������������������������������������������������������������������������������������ 10
1.		 Why repo markets matter to the real economy�������������������������������������������������������������������� 10
2.		 Role of repurchase markets in capital market development ���������������������������������������������� 10
3.		 Overview of a repurchase transaction ��������������������������������������������������������������������������������� 11
4.		 Other types of repurchase transactions ������������������������������������������������������������������������������ 12
4.1. Sell/Buy backs ������������������������������������������������������������������������������������������������������������� 12
4.2. Pledge repos����������������������������������������������������������������������������������������������������������������� 12
5.		 Role of collateral in repo transactions ��������������������������������������������������������������������������������� 13
5.1. Legal rights to re-use securities����������������������������������������������������������������������������������� 13
5.2. Function of rights to re-use underlying securities ������������������������������������������������������� 14
5.3. Policies to discourage delivery fails������������������������������������������������������������������������������ 14
6.		 Repo maturities���������������������������������������������������������������������������������������������������������������������� 14
7.		 Bilateral versus tri-party repo������������������������������������������������������������������������������������������������ 15
7.1. Bilateral repo����������������������������������������������������������������������������������������������������������������� 15
7.2. Tri-party repo���������������������������������������������������������������������������������������������������������������� 15
8.		 Clearing repos through CCPs ����������������������������������������������������������������������������������������������� 16
9.		 Necessary conditions to grow regional repo market����������������������������������������������������������� 16
9.1. Deep, liquid regional bond markets ����������������������������������������������������������������������������� 16
9.1.1. Encourage a broad, diverse investor base �������������������������������������������������������� 16
9.1.2. Improve market access, repatriation and convertibility rights for foreign investors�������������������������������������������������������������������������������������������������������������������������������������� 16
9.1.3. Increase the pool of eligible assets ������������������������������������������������������������������� 17
9.1.4. Role of central bank money in repo markets����������������������������������������������������� 17
9.2. Critical components of the legal architecture governing repo markets������������������������ 17
9.2.1. Recognition of repo documentation in legal regimes ���������������������������������������� 18
9.2.2. Harmonizing legal constructions of repo ����������������������������������������������������������� 18
9.3. Neutrality in tax treatment�������������������������������������������������������������������������������������������� 19
9.4. Market infrastructure connectivity�������������������������������������������������������������������������������� 19
9.4.1. Links between ICSDs and CSDs����������������������������������������������������������������������� 19
9.4.2. Interoperability between regional payment and settlement systems������������������� 20
10.	 Addressing policy and market constraints to developing a regional repo markets����������� 20

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ASIFMA–ICMA Guide on Repo in Asia

Section II - ASIFMA and ICMA ������������������������������������������������������������������������������������ 22
1.		 Pre-trade best practices ������������������������������������������������������������������������������������������������������� 22
1.1. On-boarding a repo counterparty��������������������������������������������������������������������������������� 22
1.1.1. Client due diligence������������������������������������������������������������������������������������������� 22
1.1.2. Negotiating repo documentation ���������������������������������������������������������������������� 22
1.1.3. Agreeing operational protocols ������������������������������������������������������������������������� 22
1.1.4. Securities & margin criteria�������������������������������������������������������������������������������� 23
1.1.5. Tri-party securities and margin eligibility������������������������������������������������������������� 23
1.1.6. Deadlines for margin calls and payments ��������������������������������������������������������� 23
1.1.7. Collateral valuation processes��������������������������������������������������������������������������� 23
1.1.8. Guidance on margin thresholds and minimum transfer amounts ���������������������� 24
1.1.9. Margin parameters to be agreed between parties before trading����������������������� 24
1.1.10. Settlement systems and instructions����������������������������������������������������������������� 24
2.		 Best practices in initiating a repo transaction ��������������������������������������������������������������������� 25
2.1. Counterparty identification ������������������������������������������������������������������������������������������ 25
2.2. Communication and messaging standards ����������������������������������������������������������������� 25
2.3. How to quote the price of a repo ��������������������������������������������������������������������������������� 25
2.4. How to quote the purchase price �������������������������������������������������������������������������������� 26
2.5. Fixing the purchase and repurchase dates������������������������������������������������������������������ 26
2.5.1 Forward repos�������������������������������������������������������������������������������������������������� 27
2.5.2. Floating-rate repos ������������������������������������������������������������������������������������������� 28
2.5.3. Open repos ������������������������������������������������������������������������������������������������������ 28
2.6. Agreeing interest rates for late payments��������������������������������������������������������������������� 29
2.7. Verifying the terms of transactions ������������������������������������������������������������������������������ 30
2.8. Affirmation process������������������������������������������������������������������������������������������������������� 31
2.9. Importance of confirmations����������������������������������������������������������������������������������������� 32
2.10. Recommended delivery size ���������������������������������������������������������������������������������������� 32
2.11. Anticipating problems that may be caused by low or negative repo rates ����������������� 33
2.12. Calculating floating-rate repo interest payments ��������������������������������������������������������� 33
2.13. Calculating open repo interest payments��������������������������������������������������������������������� 36
3.		 Best practices in managing the life cycle of a repo ������������������������������������������������������������ 36
3.1. Managing collateral in repo transactions���������������������������������������������������������������������� 36
3.1.1. Allocation of collateral in a general collateral (GC) repo ������������������������������������� 36
3.1.2. Agreeing the price of collateral ������������������������������������������������������������������������� 37
3.1.3. Fixing an initial margin or haircut ����������������������������������������������������������������������� 37
3.2. Collateral substitution��������������������������������������������������������������������������������������������������� 38
3.2.1. Agreeing rights of substitution��������������������������������������������������������������������������� 38
3.2.2. Exercising agreed rights of substitution ������������������������������������������������������������ 38
3.3. Margining best practices���������������������������������������������������������������������������������������������� 38
3.3.1. Importance of two-way margining �������������������������������������������������������������������� 38
3.3.2. Margin conventions������������������������������������������������������������������������������������������� 39
3.3.3. Margin call timing (for relevant currencies)��������������������������������������������������������� 39
3.3.4. Mark-to-market conventions in margin maintenance ���������������������������������������� 40

ASIFMA–ICMA Guide on Repo in Asia

5

3.3.5. Transactions that are included in the calculation of net exposure ���������������������� 40
3.3.6. How often should net exposure be calculated and margin called?�������������������� 42
3.3.7. Interest payments on cash margin�������������������������������������������������������������������� 42
3.3.8. Should initial margin or haircut be deducted from margin securities������������������� 42
3.3.9. Can margin securities be substituted?�������������������������������������������������������������� 42
3.3.10. When is margin returned����������������������������������������������������������������������������������� 42
3.4. Repricing – alternative to margining and income payments���������������������������������������� 42
3.4.1. How is “repricing” used to eliminate net exposures?����������������������������������������� 42
3.4.2. Coupon, dividend and other income payments on collateral ���������������������������� 43
3.5.	Confirmation and affirmation of post-trade amendments and updates to theterms of a repo������������������������������������������������������������������������������������������������������������� 43
3.6. Managing repo using tri-party services������������������������������������������������������������������������ 44
3.6.1. Pre-trade best practices in tri-party repo ���������������������������������������������������������� 44
3.6.2. Initiating tri-party repo��������������������������������������������������������������������������������������� 44
3.6.3. Collateral management by the tri-party agent���������������������������������������������������� 45
3.7. Default management procedures �������������������������������������������������������������������������������� 45
3.7.1. Failure to deliver collateral versus event of default��������������������������������������������� 45
3.7.2. What happens if there is a dispute about a margin call�������������������������������������� 47
3.7.3. Event of default protocol����������������������������������������������������������������������������������� 48
3.7.4. The issuance of termination notices to counterparties��������������������������������������� 48
3.7.5. Exercising a ‘mini close-out’ in response to a failure to deliver �������������������������� 48
3.8. Accepting partial settlement and pairing-offs �������������������������������������������������������������� 49
3.8.1. Partial settlement ��������������������������������������������������������������������������������������������� 49
3.8.2. Pairing-offs / net settlement������������������������������������������������������������������������������ 49
Annex I: Current Market Dynamics in Select ASEAN + 3 Economies����������������������������������������� 52
Annex II: Legal and Tax Arrangements in Select Asian Jurisdictions ���������������������������������������� 53
Annex III: Forms of Confirmation in Annex II of the GMRA��������������������������������������������������������� 54
Annex IV: Documentation Requirements for Client Onboarding Process���������������������������������� 56
Annex V: Example of Mini Close-out Notice�������������������������������������������������������������������������������� 57
Annex VI: Glossary of Repo Terminology������������������������������������������������������������������������������������� 58
Annex VII: Citations ���������������������������������������������������������������������������������������������������������������������� 74

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ASIFMA–ICMA Guide on Repo in Asia

Introduction

Introduction

The ASIFMA-ICMA Guide on Repo in Asia was developed to put forth best practices for the orderly trading andsettlement of cross-border repos in Asia in line with internationally recognized standards, and to address impediments
to the growth of regional repo markets. This Guide lays out structural features (such as legal frameworks, settlement
systems, and market conventions) that support sound and efficient repo markets, disseminates industry bestpractices to encourage market practitioners to adopt international standards for the efficient clearing and settling of
repo transactions, and encourages reforms to legal and regulatory frameworks that are essential to create an enabling
environment for repo markets1.

Understanding repurchase agreements and the repurchase market
Repurchase agreements (or “repos”) – defined in this Guide as classic repos and documented sell/buy backs – arethe most widely used form of secured financing transactions. Repo transactions are fully secured and subject todaily margining, which reduces their credit and liquidity risk profiles and substantially lowers the cost of financing
for financial institutions. Repos are used to meet financing needs of banks, broker-dealers and non-bank financial
institutions, among others. Institutional investors, central banks, endowments, corporate treasurers, banks and otherrisk-averse investors are the principal providers of cash in repo markets. Although repo transactions have traditionallybeen short-term instruments, the maturity of repos has been lengthening, particularly “in response to regulatory
pressure on banks to lengthen the duration of liabilities.”21
2

8

Eli Remolona, Frank Packer, inter alia, “Local currency bond markets and the Asian Bond Fund 2 Initiative” January 2012, https://www.bis.org/publ/bppdf/bispap63f.pdf, page 46.
ICMA, “Frequently Asked Questions on Repo,” May 2015, page 9,
http://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/short-term-markets/Repo-Markets/frequently-asked-questions-on-repo/.

ASIFMA–ICMA Guide on Repo in Asia

Section I - ASIFMA
Laying the Policy andRegulatory Foundation for
Efficient Repo Market Development

Section I - ASIFMA
Laying the Policy and Regulatory Foundation for Efficient
Repo Market Development
1.		 Why repo markets matter to the real economy
Liquid, deep repo markets help deepen capital markets and support the real economy.3 Specifically, repo markets
support the real economy by: (i) increasing liquidity in local currency bond markets; (ii) expanding the pool of available
finance and improving financial institutions’ ability to meet their financing needs; (iii) mitigating the reduction in market
liquidity due to regulatory change; (iv) mobilizing securities regionally; (v) improving investor confidence and participation
in local bond markets; (vi) reducing funding costs for governments, pension funds, asset managers and other longterm investors; (vii) developing market infrastructures that are necessary to serve the real economy; and (viii) offering
hedging tools which contribute to risk management.
Thus, integrating bond and repo markets in Asia would improve access to finance and diversify away from reliance onbank lending; support the development of local currency bond markets, bond futures markets, and OTC derivatives
markets; encourage retention of regional savings for regional investment; and improve securities mobility to counterthe adverse effects of increased asset encumbrance driven by regulatory change (such as Basel III, new asset
segregation rules and central clearing mandates, among others).
However, the development of repo markets in Asia has been impeded by a number of factors, principally: (i) thedivergent legal constructions of repos across economies; (ii) insufficient creditors’ protections in bankruptcy andinsolvency regimes; (iii) the lack of liquidity in regional bond markets; (iv) barriers to investor participation; (v) inefficientregional financial market infrastructures for clearing and settling repos and (vi) tax treatment that fails to recognise thetemporary exchange of collateral.

2.		 Role of repurchase markets in capital market development
Deep, liquid repo markets are important for global capital markets to function and support local currency bond market
development. Repo markets serve as a critical component of capital market development by:
i. Improving investor appeal and broadening the investor base;ii. Developing the institutional and market infrastructure to serve the real economy;iii. Facilitating price discovery and transparency across short- and long-term securities;
iv. Deepening liquidity in primary and secondary bond markets; andv. Developing hedging tools which contribute to risk management.
Improving investor appeal and broadening the investor base: The secured nature of repos reduces credit risk
and subsequent financing costs, which allows a wider array of financial institutions (including risk-averse institutional
investors) to participate in the wholesale money market. Accordingly, the secured nature of repos improves investor
appeal, diversifies the investor base, expands trading volumes, and consequently creates a deeper and more robust
market which is beneficial for market stability.
Developing market infrastructures that are necessary to serve the real economy: Deep, liquid government
securities and repo markets contribute to institutional and market infrastructure to further capital market development.
The same institutional and market foundations that are necessary for repo development – such as clearing andsettlement infrastructure, the establishment of a benchmark yield curve, experienced broker-dealers and marketmakers, among others – are the foundation upon which deeper and more liquid corporate bonds, derivatives andfutures markets may grow. Thus, undertaking reforms to develop the repo market would have positive spill-overeffects into the real economy.
Facilitating price discovery and transparency: Repo markets facilitate price discovery and transparency acrossshort- and long-term securities. Since forward rates are derived from prevailing interest rates (spot rates), repurchasing
securities at a future date (i.e. the closing leg of repos) helps discover the forward price and lengthen the yield curve.
3	Sound classic repo markets support primary markets, improve secondary market liquidity, allow for hedging mechanisms including the use of multiple trading strategies and are
prerequisites for the development of bond futures and OTC derivatives markets. They broaden funding markets and serve as fundamental links between money, bond, futures and OTC
derivatives markets.

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ASIFMA–ICMA Guide on Repo in Asia

In doing so, repo markets build a yardstick for pricing debt instruments which will stimulate greater issuance of longterm debt, such as infrastructure bonds.
Deepen liquidity in primary and secondary bond markets: Investors’ appetite for government securities
depends, in large part, on whether those securities can be sold in secondary markets with minimal impact on the
selling price.4 Repos enhance market liquidity by providing a funding source for investments in government andcorporate bonds and for financing dealer inventories of securities held for trading.5 Deep, liquid repo markets facilitate
the continuous, reliable supply of government securities, which is necessary to meet the demand of primary dealers,market-makers and investors.6 Thus, repo markets boost secondary market trading of bond securities, which, inturn, improves investor appetite for government securities in primary markets and reduces the liquidity premium on
government securities.
Develop hedging tools which contribute to risk management: Deep, liquid repo markets improve risk allocationand management by fostering derivatives markets. Government bonds are usually the securities underlying repurchaseagreements; using repo to fund long positions and cover short positions in government securities is a fundamental
precursor to the pricing of derivatives.7 As such, repo markets develop derivatives markets, which are essential toolsof risk management for financial institutions and end-users.

3.		 Overview of a repurchase transaction
A repo is a secured financing transaction in which cash is exchanged for securities, usually in the form of fixedincome securities. In a repo transaction, one party (the “seller”) sells securities to a counterparty (the “buyer”) andsimultaneously commits to repurchase the same or equivalent securities at a future date at an agreed price.8 Typically,
the “seller” is the bank, or non-bank financial institution (NBFI) that sells securities in return for cash; and the “buyer”
is the institutional investor, or other NBFI that provides cash in exchange for securities.
Repo agreements are two separate transactions – the sale and simultaneous repurchase of the underlying security –which are stipulated in a single legal agreement. Importantly, repos provide full ownership transfer of title to underlying
securities, which affords the buyer the right to re-use those assets or net them against the amount owed to them by
the seller, if the seller defaults. Between the sale and the repurchase dates, the seller is able to use the cash proceedsof the sale of the assets; and the buyer takes legal ownership of the assets received in exchange for the cash he paid
and is able to re-use these assets.9 Even though repos are a true sale and repurchase of underlying securities, they
are generally motivated by the need to borrow or lend cash in a secure way. The secured nature of repos reduces
credit risks for the buyer, and consequently offers a relatively cheap source of funding for sellers.10
The difference between the price paid by the buyer at the start of a repo and the price he receives at the end (the“repurchase price”) is the buyer’s return on the cash that he effectively lent to the seller. This return is called the “reporate.”A reverse repo is the opposite of a repurchase agreement (i.e. buying securities, then selling them back). In effect,
one party’s repo is their counterparty’s reverse repo.

4
5

6
7
8

9
10

Nicholas de Boursac, “Government Bond Secondary Market Liquidity: Seven Basic Requirements,” February 2012.
Asian Development Bank Institute, “The Development of Local Debt Markets in Asia,” November 2011,
http://www.adb.org/sites/default/files/publication/156181/adbi-wp326.pdf, page 19.
ICMA, “Frequently Asked Questions on Repo,” May 2015, page 6.
ICMA, “Frequently Asked Questions on Repo,” May 2015, page 6.
Note that the seller commits to buy back “equivalent assets,” which means the same type but not specifically the same asset (e.g. the same bond issue but not the same certificate
numbers). (Source: ICMA “Frequently Asked Questions on Repo,” May 2015.
ICMA “ERC Guide to Best Practices in European Repo Market,” March 2014; and Euroclear, “Understanding Repos and Repo Markets,” March 2009.
ICMA, Frequently Asked Questions on Repos,” May 2015,
http://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/short-term-markets/Repo-Markets/frequently-asked-questions-on-repo/, page 4.

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An example of a repo is illustrated below:
Figure 1: Repo Transaction
Repo rate

Collateral
Seller
(Repo)Cash

Buyer(Reverse repo)

Equivalent assets
Opening Leg
Closing Leg

4.		 Other types of repurchase transactions11
4.1.

Sell/Buy backs

Although sell/buy backs have the same economic function as repos, they have legal and operational differences.
The principal difference is that, while repos are always documented, traditional sell/buy backs are not. This is an
important distinction, as undocumented sell/buy backs may have serious pricing issues and are generally not subject
to margining, which increases the risk factor of these transactions. The operational differences between documented
and undocumented sell/buy-backs include the way that margining is performed, collateral (securities) substitution
rights, and what happens when a coupon or dividend is paid on collateral securities.12

4.2.

Pledge repos

Pledge repos establish priority right over the collateral pledged to a counterparty in a transaction; however other parties
may have higher ranking rights over the collateral which may not always be transparent. Since pledge agreements
do not afford the full transfer of ownership of the underlying assets, the use of pledge repos is discouraged as thereis the potential for the collateral security to be re-pledged to multiple counterparties without their knowledge. Also,
rights to re-use collateral are strictly limited in pledge repos to occasions in which the collateral-provider: (i) explicitly
authorizes the collateral-receiver to rehypothecate (re-pledge) collateral; or (ii) defaults on his obligation, which would
trigger enforcement of the default provisions of the agreement.
Limitations to the right to re-hypothecate (re-pledge) collateral assets in a pledge model – due to the lack of the fulltransfer of ownership rights to the assets – have three major drawbacks. First, it eliminates buyers’ abilities to reduce
their counterparty credit risk and liquidity risk exposures, since buyers do not have the explicit right to liquidate
collateral assets or set-off in the event of a seller default. Therefore, pledge repos do not fully protect creditors’ rights
in bankruptcy or insolvency proceedings. Indeed, the purpose of collateralization is to secure a buyer (i.e. mitigate
his credit risk) by giving him the right to liquidate collateral provided by the seller in the event that the seller becomesinsolvent or perhaps defaults in another way.13 Second, since buyers cannot re-pledge assets, there is no ability toextend collateral chains and deepen secondary market liquidity. Limitations to re-pledge collateral encumbers assets
on balance sheets, which reduces aggregate market liquidity and increases the cost of capital. Last, deciphering
which party maintains the legal title of those assets and the extent to which rehypothecation has occurred is often very
11

12

13

12

Note: In some Asian jurisdictions, such as Japan, a “borrow and lend” repo structure has emerged, in part in response to transaction taxes that deter development a “classic” repo
structure.
ICMA, “Frequently Asked Questions on Repo,” May 2015,
http://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/short-term-markets/Repo-Markets/frequently-asked-questions-on-repo/.
ICMA, Frequently Asked Questions on Repos,” May 2015,
http://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/short-term-markets/Repo-Markets/frequently-asked-questions-on-repo/, page 15.

ASIFMA–ICMA Guide on Repo in Asia

complicated and adds to legal risks and pricing difficulties of pledge agreements. These uncertainties are particularly
pronounced in resolving settlement and delivery failures, and in default or insolvency proceedings.

5.		 Role of collateral in repo transactions
The secured nature of repos plays an integral role in reducing counterparty credit risk in repo markets. Indeed, repo
agreements protect the buyer from counterparty default risk by giving the buyer the right to liquidate securities, or net
against the amount owed to the buyer by the repo seller, if the seller defaults.14 Further, the underlying securities canalso mitigate liquidity risk if they are liquid and can be re-used. That is, liquid securities purchased by the buyer can beused (sold or repoed to a third party) to meet any unforseen need for liquidity during the life of the repo.15 Therefore,
the exchange of securities is essential to hedging the credit exposure of the seller in the repo transaction and canhelp mitigate liquidity risk, which substantially reduces the risk of lending in repo transactions.
Nevertheless, in order for the transfer of collateral to have the intended effect of reducing credit and liquidity risk inrepo markets, buyers must be entitled to the legal title to the collateral during the repo transaction. Investors are only
protected in repo transactions if the title to the underlying assets becomes their property at the opening leg of therepo, which would give them the right to re-use the collateral, and to liquidate the collateral or set-off in the eventof a seller default. Accordingly, legal certainty about the right to the title of assets and the right to net in the event ofcounterparty default is a vital cornerstone of repo transactions. Without such explicit protections, investors would bedeterred from undertaking repos because they might be unable to enforce the claim to the security in the event ofcounterparty default. The transfer of the legal title to assets must underpin repo transactions in order to reduce credit
and liquidity risk in repo markets, in general, and to protect creditors’ rights and improve investor confidence in repos,
in particular.

5.1.

Legal rights to re-use securities

Although the terms collateral ‘rehypothecation’ and ‘re-use’ are sometimes used interchangeably, they have distinct
legal interpretations which have serious implications for legal risks and operational processes associated with theuse of securities in repo agreements. The legal distinction between rights to ‘rehypothecate’ and rights to ‘re-use’
underlying securities stems from differences in the legal frameworks that underpin “pledge” versus repo models,
respectively.
In a pledge model, the collateral recipient does not have explicit rights to ‘rehypothecate’ or ‘re-pledge’ the underlying
collateral securities to a third-party. That is, in a pledge agreement, the ownership title of securities remains with thecollateral-provider. The collateral-receiver would not be able to use or liquidate pledged collateral for his own purposes
unless the collateral-provider defaulted on his obligation (which would trigger enforcement of the default provisions of
the agreement); or explicitly awarded rights to rehypothecate to the collateral-receiver. Even if the collateral-provider
grants the collateral recipient the right to rehypothecate those assets, the collateral-provider maintains the ownership
title but only until the collateral-receiver exercises his right to rehypothecate. When that right of rehypothecation is
exercised, the collateral-provider loses his title to the collateral and it is transferred to the third-party to whom thecollateral has been rehypothecated.16 Deciphering which party maintains the legal title of those assets and the extent
to which rehypothecation has occurred is often very complicated and adds to legal risks, pricing difficulties, and lackof transparency in pledge agreements. These uncertainties are particularly pronounced in resolving settlement anddelivery failures, and in default or insolvency proceedings. Thus, pledge transactions are less secure than true-sale
repos, as a pledge creditor (collateral-receiver) could become an unsecured creditor to the collateral-provider if theright to rehypothecate or liquidate assets is not expressly provided and the collateral-provider defaults.
Pledge repos should be discouraged due to insufficient protections of creditors’ rights, the prospect that collateral
securities can be re-pledged to multiple counterparties without their knowledge, and the subsequent legal andfinancial risks incurred by trading counterparties.

14
15

16

Euroclear’s “Understanding Repos and Repo Markets,” March 2009.
ICMA, Frequently Asked Questions on Repos,” May 2015,
http://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/short-term-markets/Repo-Markets/frequently-asked-questions-on-repo/, page 4.
ICMA, “Frequently Asked Questions on Repo,” May 2015,
http://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/short-term-markets/Repo-Markets/frequently-asked-questions-on-repo/, page 10.

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Efficient Repo Market Development
By contrast, the right to ‘re-use’ underlying securities is inherent in the true-sale framework of repos. In repos, thelegal title of securities is actually transferred from the collateral-provider to the collateral-recipient at the outset of theagreement. That is, his “right of re-use is not a right granted by the seller. It is an automatic right arising from property
ownership.”17 Thus, the collateral-recipient may ‘re-use’ collateral in any way he desires, such as selling or lending it
to a third party, since he owns the collateral outright (while always bearing in mind his obligation to return equivalentissues when the repo matures).18

5.2.

Function of rights to re-use underlying securities

The right to re-use securities plays a fundamental role in deepening capital markets. The ability to re-use securities
decreases the net demand for quality assets and reduces liquidity requirements of market participants, since a given
pool of securities can be reused in multiple sale/repo transactions with the same quantum of cash.19 Thus, the rightto re-use securities enhances the efficiency of financial markets by increasing collateral velocity, extending collateralchains, reducing transaction costs, improving secondary market liquidity, improving price discovery, lengthening theyield curve, and mitigating temporary shortages of securities. Collateral mobility is necessary to meet new regulatory
requirements under Basel III capital and liquidity provisions, central clearing mandates, and asset segregation rules,
as well as to counter the adverse effects of asset encumbrance that are a product of such regulatory reforms.

5.3.

Policies to discourage delivery fails

Delivery fails are an intrinsic characteristic of the repo market, as they are in all capital markets, due to the likelihoodthat market practitioners will face temporary operational challenges, illiquidity due to market conditions, or otherobstacles that will lead to delays and delivery fails. While it is important to discourage fails to avoid market disruption
and improve investor confidence, penalties for delivery fails should not be so punitive that they deter participants fromtrading. Fail clauses (i.e. in master repurchase agreements) ensure that the technical inability to deliver securities does
not give rise to a formal default. Such fail clauses allow the market to tolerate occasional fails by giving counterparties
alternative options to resolve deliveries and settlements (see “3.7. Default Management Procedures” of section II).
Additionally, the Global Master Repurchase Agreement (GMRA) – which is the standard repurchase agreement forcross-border repo markets – contributes to risk management in repo markets by stipulating safeguards of creditors’rights in the event of a default or fail. For instance, the GMRA protects repo sellers by affording them the right toinitiate a mini-close out with buyer if he fails to deliver collateral on the repurchase date. Triggering a mini-close out
is a serious and costly step, as it enables the seller to set-off and increases the credit spread for the buyer in futuretransactions (see “3.7. Default management procedures” of section II). The penalty provides enough incentive fora party to do everything that is commercially reasonable to not fail. Thus, the market corrects itself by providing
incentives for market practitioners to self-govern in order to protect their reputation and credit risk profile, which thus
preserves the integrity of the market.
In light of the inherent risks of delivery fails in repo markets, market practitioners should adhere to international
best practices by ensuring fail clauses and pre-agreed penalties are incorporated into their master repurchaseagreements, and adopt operational and liquidity management best practices to reduce the incidence of delivery fails.
Such protections afforded in the legal agreements that underpin repos, coupled with the penalties imposed on fails,
help support the development of efficient, sustainable repo markets.

6.		 Repo maturities
Repo transactions have no standard durations; and repo maturities range from overnight to a number of years(i.e. term repos), or they can be flexible to meet the needs of parties involved (i.e. open repos). Overnight repos
are transactions in which securities are sold and then repurchased the following day. Financial institutions can use
overnight or short-dated repos (with terms of one month or less) to raise short-term money (such as to financesecurities inventories). Although repo contracts have traditionally been short-term instruments, their maturity dates arelengthening, particularly “in response to regulatory pressure on banks to lengthen the duration of liabilities.”20 Thus,
17
18
19
20

14

Ibid, page 11.
Singh, Manmohan, IMF Working Paper, “Velocity of Pledged Collateral,” November 2011, http://www10.iadb.org/intal/intalcdi/PE/2011/09293.pdf, page 9.
Ibid.
ICMA, “Frequently Asked Questions on Repo,” May 2015, page 9,
http://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/short-term-markets/Repo-Markets/frequently-asked-questions-on-repo/.

ASIFMA–ICMA Guide on Repo in Asia

overnight and short-dated repos are becoming less common and term repos are gaining popularity.
“Term” repos mature in one year or later. Due to their longer horizon, term repos are usually tied to floating (rather than
fixed) rates and have enhanced rights of substitution to allow counterparties more flexibility to optimize their collateral/
securities inventory over the duration of the repo agreement.
Further, “open” repos have no fixed maturity date and are callable by either party subject to a minimum period ofnotice. It is best practice, when negotiating an open repo, to agree to the delivery period for the collateral, collateralsubstitution rights, and the deadlines for margin deliveries and the minimum termination notice (see “1.1. On-Boarding
a repo counterparty” of section II).21
The obligations of each counterparty do not implicitly extend beyond terms of the trade (i.e. there is no implicit
expectation to roll beyond contractual maturity).

7.		 Bilateral versus tri-party repo
Repo transactions can be settled either bilaterally or with the facilitation of a tri-party agent for collateral management
purposes.

7.1.

Bilateral repo

Bilateral repo between sellers and buyers is conducted on a delivery-versus-payment (DvP) basis. That is – after
the transaction has been agreed to on electronic trading systems, through phone or by electronic messaging – thetransfer of cash and collateral occur simultaneously between the seller and the buyer or their agent custodian banks.
DvP is a mechanism to reduce settlement risks by ensuring that delivery occurs if and when payment is made. In
doing so, DvP protects counterparties from making delivery without receiving payment (or vice versa), the principal
risk in bilateral repo transactions. Each trading party is responsible for providing accurate settlement instructions
to their agents or entering them into the relevant settlement systems, where they are matched.22 DvP settlement
facilitates the simultaneous transfer of securities (delivery) and funds (payment) between repo buyers and sellers overthe life of the transaction. In order to efficiently trade and settle repos bilaterally, market participants must have suitableback office operational capabilities to link to and monitor their agent custodian banks or to directly manage securities
inventories, including receiving and transferring securities, valuing assets, and administering margin calls.

7.2.

Tri-party repo

Tri-party repo is the process by which parties outsource their post-trade processing to a third-party agent, which canbe particularly valuable for non-banks, who may lack back office capabilities. Tri-party agents serve as independent
custody agents, perform daily re-pricing for collateral securities and margin over the life of the repo transaction,
manage collateral inventories, and settle trades by moving securities and cash to and from the accounts of repo
buyers and sellers as necessary to fulfill their repurchase agreements. Understanding the credit risk profile of a triparty repo provider, as well as their asset segregation and portability policies, is key to effective risk management in
tri-party repo.
Tri-party repos reduce counterparty and operational risk, and facilitate multi-currency, cross-border collateralmanagement, by having a centralized intermediary through which transactions are settled. By serving as anindependent custody and holding collateral securities and margin, the tri-party agent ensures that collateral assets are
truly available to the buyer and thus offers additional protection in the event of counterparty default. In consequence,settlement and delivery fails are more easily resolved in a tri-party platform compared to a bilateral platform. Triparty agents also undertake the operational processes of managing and valuing collateral (including mark-to-market
valuations and meeting margin calls) on a more granular basis than what would be operationally feasible on a bilateralbasis, which may reduce operational risk. Tri-party agents enhance settlement efficiency by integrating their collateralmanagement systems with their settlement platforms, which allows for automated substitution of collateral.

21
22

ICMA “ERC Guide to Best Practices in European Repo Market,” March 2014, Section 5.10.
Bank for International Settlements “Strengthening repo clearing and settlement arrangements”, page 27.

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Laying the Policy and Regulatory Foundation for
Efficient Repo Market Development
Tri-party agents are responsible for the selection of collateral on behalf of the seller, subject to the buyer providing
a schedule of acceptable securities. Collateral selection is typically done automatically by means of an algorithm.
Consequently, the parties do not know the particular issues of securities that will be transferred. This means tri-party
repos are cash-driven and cannot be used as a means of borrowing particular securities. In addition, the collateral
selected by a tri-party agent’s algorithm is typically a basket of several issues.
For initiating tri-party repo, see 3.6.2. of section II.

8.		 Clearing repos through CCPs
Repo transactions can be cleared through a central counterparty (CCP), which serves as an intermediary and becomes
the buyer to every seller and the seller to every buyer in a repo transaction. CCPs can play a critical role in reducing
risk in repo markets. In particular, CCPs reduce settlement risk by the multilateral netting offsetting transactions
between multiple counterparties. In addition, CCPs reduce credit risk by assessing the credit risk profile of clearing
firms, calling collateral and margin to protect against counterparty default, and sharing risk among members throughcontributions of initial margin and to a default fund. Thus, compared with bilateral trading, clearing repos through
CCPs improves netting efficiency, reduces counterparty exposures and decreases subsequent capital charges formarket participants.
However, the usefulness of a CCP depends on the level of standardization of repo contracts, which are often agreed
bilaterally and may be too customized or too thinly traded to justify clearing.23 Further, utilizing CCPs for repo clearing
may also have some disadvantages, as CCPs concentrate credit, liquidity, operational and legal risks into one entity.
Thus, there is growing concern that CCP failure could have systemic consequences. Therefore, it is imperative
for CCPs to be adequately supervised, sufficiently capitalized, and to employ international best practices in risk
management, such as those put forth by the Committee on Payment and Settlement Systems and International
Organization for Securities Commissions in the Principles for Financial Market Infrastructures.24

9.		 Necessary conditions to grow regional repo market
There are several policy issues to address to foster an enabling environment for repo markets. In particular, thenecessary conditions to develop cross-border repo markets are: (i) Deep bond market liquidity; (ii) Sound legal
framework that protects creditors’ rights in bankruptcy and insolvency proceedings; (iii) Robust investor participation;(iv) Neutrality in tax treatment; and (v) Efficient and interoperable market infrastructures to support cross-border repo
markets.

9.1.

Deep, liquid regional bond markets

The relationship between efficient repo markets and local currency bond markets is mutually reinforcing. In particular,
efficient repo markets depend on the liquidity provided by a robust government bond market, whilst the developmentof repo markets will also assist the further development of local currency government bond markets by deepening
secondary market liquidity, improving price discovery mechanisms, and inducing broader investor participation in
local currency bond markets.
9.1.1.	 Encourage a broad, diverse investor base
Broadening the investor base brings much needed liquidity to the market by having a range of investors with different
risk profiles and investment horizons which enhances trading volumes and liquidity across short, medium and longterm maturities. Thus, in order to deepen liquidity in regional bond and repo markets, policymakers must induce moreparticipation from institutional investors and reduce restrictions on investor participation.
9.1.2.	 Improve market access, repatriation and convertibility rights for foreign investors
To further broaden and diversify the investor base, policymakers must improve market access, repatriation andconvertibility rights for foreign investors. Restrictions on foreign investors – such as prohibitions or registration
23
24

16

BIS Committee on Payment and Settlement Systems, “Strengthening Repo Clearing and Settlement Arrangements,” September 2010, http://www.bis.org/publ/cpss91.pdf, page 8.
Committee on Payment and Market Infrastructures (formerly CPSS) and International Organization for Securities Commissions, “Principles for Financial Market Infrastructures,” April 2012,
http://www.bis.org/publ/cpss101a.pdf.

ASIFMA–ICMA Guide on Repo in Asiarequirements for nonresidents – deter market participation, reduce liquidity and impede the development of an efficient
cross-border repo market. In addition, assured rights to convert currency and repatriate earnings for both foreign anddomestic investors is necessary to instill confidence in bond and repo markets. Thus, it is essential to liberalize market
access for foreign financial institutions across the region to enhance participation, diversify the investor base, andincrease market liquidity.
9.1.3.	 Increase the pool of eligible assets
Market liquidity is dampened by restrictions on the pool of assets that are eligible for repo markets. For instance,
limitations on the ability of financial institutions to utilize bond holdings in repo markets encumbers assets on balance
sheets and reduces primary and secondary bond market liquidity. Thus policymakers should promote the use
sovereign and corporate bonds in Asian economies as eligible collateral for repo transactions. This would contributeto the stability of repo market funding, as collateral in the form of benchmark securities (such as those issued by major
governments) usually retain their value and are easily liquidated, even in market crises. Further, Asian central banks
should collaborate to establish cross-border collateral arrangements to increase the pool of eligible securities to be
traded across borders.
9.1.4.	 Role of central bank money in repo markets
The supply of central bank money in repo markets is not a requisite condition to develop sound and efficient repo
markets. However, repo markets can serve as an important economic and monetary policy tool for central banks.
Central banks often use repo to conduct monetary policy operations, transmit monetary policy to the real sector, andprovide emergency liquidity in times of market stress. Therefore, central banks can serve as key players to promote
the development of repo markets by smoothing the supply of high quality assets, and enhancing the stability andliquidity of the market.
More fundamentally, central banks play an important role in developing a stable yield curve (through issuing government
bonds at a wide range of maturities) which provides the benchmark for broader credit markets.

9.2.

Critical components of the legal architecture governing repo markets

Sound legal architecture of repo transactions is the foundation upon which repo markets may develop and grow.
Repos are characterized by the full legal ownership title of collateral, which affords the buyer the right to re-use assets
and safeguards creditors’ rights by providing the buyer netting rights in the event of a counterparty default.
Yet legal regimes governing repo markets vary considerably across the Asian region, and many lack the necessary
protections to instill investor confidence in repo contracts. Such legal ambiguity hampers the ability of market
participants to operate across borders and undermines investor participation in repo markets. Although reforming
legal and regulatory frameworks in certain jurisdictions may be challenging, such protections in the legal framework
are a necessary component of building investor confidence in repo markets. For example, according to analysis by
the Bank for International Settlements:	When financial institutions engage in repos with each other [in certain Asian jurisdictions], lenders often
impose rather strict credit limits on their counterparties, thus behaving as if the transactions were not truly
secured. This phenomenon seems to arise from master agreements and legal frameworks that fail to ensurethat the lender will in fact be able to take possession of the collateral in the event of default.25
The lack of investor confidence in repo transactions in Asia stems from the absence of explicit legal protections
safeguarding creditors’ rights in repo agreements. Investors are protected in repo transactions by the transfer of legal
title to the securities, which gives the buyer the right to re-use assets during the term of the repo transaction, as wellas the right to liquidate the securities or net (set-off) in the event of counterparty default.26 A central concern for repo
buyers is the risk that a court would invalidate the transfer of title to the securities and re-characterize the repo as asecured loan. In many jurisdictions, such re-characterization would deprive repo buyers of any rights to the securities,
25
26

Eli Remolona, Frank Packer, inter alia, “Local currency bond markets and the Asian Bond Fund 2 Initiative” January 2012, https://www.bis.org/publ/bppdf/bispap63f.pdf, page 46.
ICMA, “Frequently Asked Questions on Repo,” May 2015,
http://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/short-term-markets/Repo-Markets/frequently-asked-questions-on-repo/, page 15.

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Laying the Policy and Regulatory Foundation for
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and the buyer would find itself without recourse in the event of counterparty default. 27
This ambiguity may stem from the fact that repo contracts are defined as a sale and simultaneous repurchase of
the underlying security, but they behave economically as a means of borrowing and lending cash. Therefore, the“essential legal risk to be addressed for the development of a repo market is the risk of re-characterization of repo
trades in bankruptcy courts.”28 The principal aim of policymakers must be to ensure legal frameworks safeguard theunequivocal right of the counterparty acquiring securities in a repo transaction to sell them if the other counterparty
defaults and that these rights are unambiguously reflected and upheld in bankruptcy procedures.29
To address these legal uncertainties, the unique characteristics of repo contracts (i.e. that they are legally structured
as a sell and repurchase of securities) must be explicitly reflected in legal frameworks including bankruptcy andinsolvency regimes in each Asian jurisdiction. Further, policymakers must clarify in domestic law the property rights
afforded to creditors regarding securities purchased in repo transactions (i.e. explicit transfer of title of underlying
collateral assets) and their subsequent rights to set-off in the event of counterparty default.30 The explicit transfer of
title in repo markets in legal regimes is paramount to protecting creditors’ rights in the event of default.
Accordingly, undertaking legal and regulatory reform may be necessary to improve investor confidence in repo
agreements and to establish well-functioning repo markets that support the real economy.
9.2.1.	 Recognition of repo documentation in legal regimes
Legal certainty is reinforced when domestic law explicitly recognizes that the repo contract or the master repo
agreement is also enforceable in bankruptcy proceedings. 31 As such, master agreements – which stipulate payment
protocols, netting and close-out rights, etc. – must be soundly established in law to induce market practitioners toengage in these types of agreements.
The GMRA has emerged as the international standard for cross-border repo markets. In particular, the GMRA
contributes to risk management in repo markets by stipulating safeguards of creditors’ rights in the event of default
or fails; facilitating pre-trade agreement on key protocols such as transfer of legal title, margin and collateral; andstandardizing management of payments on collateral.
The GMRA’s enforceability is determined by the underlying legal frameworks and rule of law in subject jurisdictions.
In particular, the GMRA’s significance is predicated upon: (i) recognition of the legal and economic characteristics ofrepo transactions in subject jurisdictions; (ii) recognition of the GMRA that underpins repo transactions in domestic
legal frameworks; and (iii) arbitration clauses for cross-border transactions.
In consequence, recognition of repo documentation (such as the GMRA) in domestic law and bankruptcy andresolution frameworks is an essential element to protect creditors’ rights in insolvency cases and to assure investorsof enforceability of repo contracts. See Annex II for a list of Asian jurisdictions which utilize the GMRA.
9.2.2.	 Harmonizing legal constructions of repo
Many legal regimes governing repo markets lack the necessary protections to instill investor confidence in repo contracts.
Bankruptcy and insolvency law protections vary considerably across Asian jurisdictions and impair legal certainty, whichhampers the ability of market participants to operate across borders and undermines investor participation in repo
markets. Harmonizing the legal construction of repos by adopting the true-sale framework of repos would ensure thatlegal rights to re-use collateral assets and creditors’ rights to set-off (net) in the event of counterparty default would beunambiguously protected in bankruptcy and insolvency regimes across all Asian jurisdictions. Thus, consistency in thelegal and market characteristics of repo markets across Asian markets is imperative to: (i) reduce legal uncertainties
and risks of conducting repo transactions across borders; (ii) improve investor and business confidence; (iii) reducecompliance costs; and (iv) improve efficiency and lower the cost of cross-border trading.
27
28
29
30
31

18

Ibid, page 15.
World Bank handbook on repo markets, 2010, page 12.
Ibid, page 12.
Ibid, pages 12-13.
Ibid, page 60.

ASIFMA–ICMA Guide on Repo in Asia

9.3.

Neutrality in tax treatment

In many Asian jurisdictions, tax policy distorts pricing and hinders the development of a repo market. The main
distortionary taxes are stamp duties and transaction taxes which adversely impact market development by raising
the cost of repo transactions and reducing demand for government securities.32 Further, withholding taxes “reduceinvestment yield and the attractiveness of the investment in local currency securities for non-resident [investors]”.33
Levying withholding taxes on nonresident investors can severely reduce foreign participation in the secondary market,
which raises the cost of trading and reduces aggregate market liquidity.34
Stamp duties and transaction taxes increase costs disproportionately to the interest income derived from repo
transactions. Thus, stamp duties or financial transaction taxes would make repo transactions economically unviable
and unattractive for financial institutions. Further, the implementation of a transaction tax undermines investor
confidence, dampens investor appetite for government securities and repos, increases the cost of debt financing forgovernments and financial institutions and reduces the attractiveness of secured financing transactions.
For instance, implementation of a financial transaction tax on securities trades in Japan caused its major repo market– the gentan market – to morph into a borrow and lend structure rather than repurchase market in order to avoid
the tax. As a result, the securities lending structure does not fully protect against credit risk (as it does not afford
the transfer of title of securities) as well as restricts collateral re-use which hampers the positive impact on market
liquidity. Consequently, it is best practice to eliminate stamp duties and transaction taxes to help foster an enabling
environment for bond and repurchase markets.

9.4.

Market infrastructure connectivity

Cross-border investment is aided by the efficient financial market infrastructures which facilitate the deployment andtransmission of capital across borders. Strengthening connectivity between (or interoperability of) financial market
infrastructures in Asian markets would improve efficiency and reduce the cost of trading, improve price discovery andenhance risk management.
Efficient market infrastructure, including clearing and settlement systems, is an integral component of developing
deep, liquid repo markets. Interconnectivity between market infrastructures is central for cultivating an efficient repo
markets to enable the transfer of collateral assets between cross-border investors. Fragmented securities clearing
and settlement infrastructures is a barrier to the efficient mobilization of collateral. Currently, market infrastructures are
fragmented across the Asian region, which increases costs for cross-border transactions, slows settlement timing,and increases operational risk.35 Market infrastructures need to be strengthened to espouse international standards
and connected in order to support cross-border repo markets.
9.4.1.	 Links between ICSDs and CSDs
In particular, regional markets must develop links between domestic Central Securities Depositories (CSDs) andInternational Central Securities Depositories (ICSDs) so government bonds can be efficiently delivered and held at
ICSDs in cross-border transactions. In addition, it is necessary to establish cross-border links between securities
settlement systems (SSS) in order to manage the flows of funds and securities between buyers and sellers in crossborder transactions. Strengthening and integrating market infrastructures is critical to improving the cross-bordermobility of assets and reducing operational risks in repo markets.
The most important benefits of such connectivity between CSDs and ICSDs are: (i) increased liquidity for local
currency bonds since they can be used offshore; (ii) enhanced stickiness of foreign investments in local markets;and (iii) deeper pool of collateral since barriers to cross-border flows are removed. Further, efficient links between
CSDs and ICSDs improve settlement efficiency by: (i) providing timely information and feedback on the status of
settlement instructions in order to allow users to fix unsettled transactions as soon as possible; (ii) improving efficiency
in matching processes which reduces settlement and operational risks; (iii) allowing failed repos to be netted off
32
33
34
35

IMF, “A Framework for Developing Secondary Markets for Government Securities,” July 2008, https://www.imf.org/external/pubs/ft/wp/2008/wp08174.pdf, page 10.
Eli Remolona, Frank Packer, inter alia, “Local currency bond markets and the Asian Bond Fund 2 Initiative” January 2012, https://www.bis.org/publ/bppdf/bispap63f.pdf.
IMF, “A Framework for Developing Secondary Markets for Government Securities,” July 2008, https://www.imf.org/external/pubs/ft/wp/2008/wp08174.pdf, page 19.
IMF, “A Framework for Developing Secondary Markets for Government Securities,” July 2008, https://www.imf.org/external/pubs/ft/wp/2008/wp08174.pdf, page 5.

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Section I - ASIFMA
Laying the Policy and Regulatory Foundation for
Efficient Repo Market Development
against each other; and (iv) allowing the immediate finality of settlement which reduces legal risks and allows theprompt re-use of securities.36
9.4.2.	 Interoperability between regional payment and settlement systems
Interoperability between regional payment and settlement systems is very important to bring to fruition Straight throughProcessing (STP) of bond and repo transactions. STP is important to improve settlement processing and efficiency
and reduce risk for cross-border bond and repo transactions. STP enhances settlement efficiency by automating
post-trade processing of securities transactions. However, the use of different proprietary messaging codes andsecurities identifiers across CSDs makes STP more difficult, as it requires reconciliation by either the local or global
custodian and increases the risk of error for settling cross-border transactions. Consistency in messaging standards
and securities numbering is integral to implement STP and it is best practice to adopt international standards formessaging formats37 (such as ISO standard) as well as for securities identifiers38 (such as ISIN codes) to enhancesettlement efficiency and reduce the risk of errors for cross-border transactions.

10.		 Addressing policy and market constraints to developing a regional repo markets
Developing a cross-border repo market in Asia will require addressing a number of policy and regulatory issues tocreate an enabling environment for repo markets. Regional policymakers can engender a well-developed repo market
by implementing the following recommendations:• Move towards a true sale repo market in Asian economies;• Improve creditors’ rights protections in legal frameworks;• Adopt standardized legal documentation;• Improve liquidity in Asian bond markets; and• Strengthen interoperability of market infrastructures.

36

37

38

20

ICMA white paper on the operation of the European repo market, the role of short-selling, the problem of settlement failures and the need for reform of the market infrastructure, July 2010,
http://www.icmacentre.ac.uk/files/euro_repo_market_white_paper_jul10.pdf
Asia Development Bank, “ASEAN + 3 Bond Market Guide, Part 1: Bond Markets and Their Infrastructures in ASEAN+3,” page 13,
http://www.adb.org/publications/asean3-bond-market-guide.
Ibid, page 23.

ASIFMA–ICMA Guide on Repo in Asia

Section II - ASIFMA and ICMABest Practices across the Repo
Trade Lifecycle

Section II - ASIFMA and ICMABest Practices across the Repo Trade Lifecycle39

1.		 Pre-trade best practices
1.1.

On-boarding a repo counterparty

The counterparty on-boarding process is a preliminary assessment to help firms understand their counterparty’s
financing goals and trading preferences. In addition, due to a web of regulatory requirements, the on-boarding
process has become a crucial procedure in assessing and mitigating reputational, operational, legal, market andcredit risks before establishing a trading relationship.
1.1.1.	 Client due diligence
The client due diligence process aims to assess each counterparty’s risk, in terms of credit risk as well as regulatory
risk (i.e. anti-money laundering (AML) and know-your-customer (KYC) requirements). In order to assess credit risk andestablish credit terms for the execution of repo agreements, counterparties must share financial and corporate information
to determine their counterparty’s risk rating. In turn, each trading partner will establish credit limits as appropriate.
A general list of documents required during the client on-boarding process can be found in Annex IV.
In addition, counterparties must perform regulatory AML and KYC due diligence as required by law in home andhost jurisdictions. In order to fulfil their AML and KYC due diligence obligations, counterparties will need to share
information on the internal controls and procedures that they have in place to identify and monitor high risk activities
undertaken by their customers and the procedures in place to mitigate exposure to illicit behaviors, which is a key
element of reputational and legal risk management.
The AML/KYC process varies significantly across jurisdictions and is beyond the scope of this document. Pleasecontact your repo counterparty/provider for specific requirements.
1.1.2.	 Negotiating repo documentation
In order to minimize legal risks in repo transactions, it is best practice to ensure proper documentation underpins all
repo transactions before they are executed. Documentation requirements include the Global Master Repurchase
Agreement (GMRA) or relevant Master Repurchase Agreements (MRA) in host jurisdictions and in addition, if done
under a tri-party arrangement, a tri-party collateral management service agreement. To decrease the operationalburden of managing diverse repo contracts, the GMRA has emerged as the international standard for cross-border
repo markets. The standard provisions of the GMRA reduce operational requirements by harmonizing market practices
and expectations (thereby reducing the risk of fails), and reducing the effort (and time) necessary to negotiate suchcontracts. In addition, the annexure to the GMRA provides supplemental terms and conditions for repo counterparties
to customize the terms of their repo agreement which offers flexibility to tailor the agreement to market and transactionspecific conditions. Also, transaction specificity is given by the use of confirmations, and Annex I to GMRA allows
tailoring to each relationship.
The use of a legally enforceable, industry-standard master repurchase agreement affords specific legal protections
and mitigates counterparty-specific inconsistencies that could result unresolvable disputes and/or ambiguous
enforcement procedures to handle an events of default. It is also important to recognise the need for regular review oflegal opinions (e.g. annually) to ensure such agreement continues to be robust, which is a condition set by regulators
for the recognition of collateral in the reduction of capital charges. Moreover, without an acceptable written agreement,
many global banks will no longer transact repo. These specific legal protections, embedded in the GMRA, include:(i) close-out netting upon the incidence of a counterparty default; and (ii) rights to liquidate collateral assets to reduce
liquidity risk to recoup values owed in the event of a counterparty default.
1.1.3.	 Agreeing operational protocols
There are several parameters to be agreed between parties before trading, including margin criteria, payment protocols,
collateral valuation processes, and management of margin calls and minimum transfer amounts, among others.

39

22

Given the continued evolution of market practices, material within this section that is drawn from the ICMA ERC Guide to best practice in the European Repo Market may not at all times fullyreflect updates to that ICMA ERC Guide (the latest version of which is available on the ICMA ERC website).

ASIFMA–ICMA Guide on Repo in Asia

1.1.4.	 Securities & margin criteria
Prior to initiating a trading relationship, parties should agree to collateral criteria, particularly the types of security issues
and classes of security that will be acceptable in securities and margin transfers, and record those specifications in
the legal agreement.40 In a repo transaction, the cash provider (or repo buyer) dictates the terms of the acceptablesecurities or margin required of the buyer or seller.41 The repo buyer should specify their securities and margin criteria
up front to convey their preferences for certain asset classes or instrument types, and preclude other securities as
acceptable margin. Securities and margin criteria would also reflect a buyer’s concentration limits on issuers, countries
and asset types, among others, as well as their preferences regarding liquidity considerations and credit ratings. Also,
the parties can agree to a basket of securities which would afford the securities provider the right of substitution.42
It is best practice for the margin-taker to accept securities given as margin if they are recognized as general collateralin the repo market or if they have characteristics the same as or better than the collateral being reversed in by themargin-taker. It is also best practice to specify acceptable margin securities in the legal agreement between theparties. However, if that is not possible, the margin-taker should act reasonably and in good faith when offered margin
securities.43
1.1.5.	 Tri-party securities and margin eligibility
Securities and margin eligibility is up to the discretion of the repo buyer and seller. Additionally, the tri-party systemallows them to consider a broader range of securities due to the granularity in determining asset eligibility (such asconcentration limits per asset type, differentiated haircuts per asset type, maximum age of quotation, activation of
specific restrictions, etc.) Such granularity in the securities eligibility schedule, combined with automated substitution,
increases the range of eligible securities for use in tri-party repo transactions.
1.1.6.	 Deadlines for margin calls and payments
Margin call cut-offs should be agreed prior to the point-of-trade and listed in the annex to the legal agreement (master
repurchase agreement). For margin transfers between two APAC-based counterparts, margin calls should be madeby latest of buyer/seller 14:00 local time, or otherwise as agreed by both counterparties, to allow margin to betransferred the same day as or the day after the call is made. Further, if a party receiving a margin call wishes to fulfil
the margin call with securities, it must notify its counterparty of the margin securities selected by latest of buyer/seller
17:00 local time, or otherwise as agreed by both counterparties.
For APAC-EMEA trades (i.e. for circumstances in which one party’s operations team is located outside of Asia),
margin calls should be issued and agreed by 14:00 CET.
Margin calls made after the relevant deadlines listed above should be treated as though they were made on the next
business day.
It is best practice to respond to margin calls operationally by T+0 for all margin calls received by the relevant deadlines
listed above. Cash should be delivered on the same day as the call is made (T+0), if possible, or the next day (T+1).
Further, bonds or other margin securities should be delivered the next business day after receiving the margin call(T+1), but is preferred that they be delivered on the same business day (T+0), where possible.
1.1.7.	 Collateral valuation processes
Industry-recognized price sources to be used to value collateral, either routinely or in the event of a margin disputeshould be bilaterally agreed prior to trading and available to both counterparties. Disagreement about the prices usedin valuing collateral can be avoided by documenting the pricing sources in the legal agreement between the twocounterparties (such as the GMRA).44

40
41
42
43
44

ICMA “ERC Guide to Best Practices in European Repo Markets,” Annex II - Repo Margining Best Practices, page 65.
Barclay’s “Repo Market Masterclass,” May 2014.
Barclay’s “Repo Market Masterclass,” May 2014.
ICMA “ERC Guide to Best Practices in European Repo Markets,” Annex II - Repo Margining Best Practices, page 65.
AFMA, Repurchase Agreement (Repo) Margining Best Practice Guide, April 2014,
http://www.afma.com.au/standards/codes-practices/AFMA_Repo_Margining_Best_Practice_Guide.pdf, page 7.

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Section II - ASIFMA and ICMABest Practices across the Repo Trade Lifecycle

Collateral securities should be valued at their dirty or gross prices, rather than their clean prices.45 However, since themargin collateral transfer date (T+0, +1 or +2) may vary depending on the instrument used, applying a different rule
for fixing accrued interest on collateral can be cumbersome. Thus, it is best practice to value collateral securities attheir dirty or gross prices with accrued interests up to the date on which the collateral is valued (which is typically theclose of business day prior to margining date).
1.1.8.	 Guidance on margin thresholds and minimum transfer amounts
In order to reduce the operational burden posed by a high volume of daily margin calls, parties often agree to aminimum net exposure below which they will not call a margin on each other, which is referred to as a margin
threshold. Once the Net Exposure meets or exceeds this threshold, parties will call margin sufficient to eliminate theentire net exposure.46 Minimum transfer amounts (MTAs) define the minimum amount that can be called for margin inorder to reduce the operational burden (and risk) of reconciling the volume of daily margin calls. Typically, the margin
threshold and MTA amounts are the same, but could be different so long as the minimum transfer amount is equal
to or greater than the margin threshold so that it is sufficient to eliminate the entire net exposure. It is best practice toconfirm the relevant margin threshold and MTA at the point-of-trade.
In some ways, MTAs illustrate a trade-off between minimizing operational risks and maintaining prudent counterparty
credit risk practices. Therefore, the establishment of margin thresholds and minimum transfer amounts should be
negotiated bilaterally, as they depend on parties’ internal risk tolerance / risk limits and counterparty credit assessments,
which vary across transactions. Margin thresholds and minimum transfer amounts should be determined based on
mutual credit assessments and agreed to before trading starts47. In general, it is best practice to employ tighter
margin thresholds for smaller cap entities, and to vary threshold levels to reflect distinct credit risk profiles (i.e. credit
ratings). There are no standard margin thresholds and minimum transfer amounts, though “counterparties may agree
to thresholds and minimum transfer amounts based on their mutually agreed credit assessments”.48
1.1.9.	 Margin parameters to be agreed between parties before trading49
In order to reduce the scope for misunderstandings and margin disputes, it is best practice to agree the following
parameters before trading:• Price sources to be used to value collateral, either routinely or in the event of a margin dispute• Whether the middle or bid rate will be used in the valuation of collateral• In the case of sell/buy-backs, the rate at which manufactured payments will be reinvested until the repurchasedate• Minimum transfer amounts• Security issues or classes of security that will be acceptable in margin transfers• Whether initial margin or haircuts will be applied to margin securities• Deadlines for delivering cash margin and margin securities• Interest rates on cash margin• In the case of sell/buy-backs, whether the re-pricing or adjustment method will be used instead of margining
1.1.10.	 Settlement systems and instructions
The international standard is that repo trades are settled on a T+1 basis (next business day settlement) or T+0(same business day settlement). Yet currently, T+2 is common in Europe, and it is the practical settlement
timeline for repo agreements in Asia due to the operational challenges posed by different currencies and timezones across the region.

45
46
47
48
49

24

ICMA “ERC Guide to Best Practices in European Repo Markets,” Annex II - Repo Margining Best Practices, section 4.
ICMA “ERC Guide to Best Practices in European Repo Markets,” Annex II - Repo Margining Best Practices, section 6-7, pages 64-65.
ICMA “ERC Guide to Best Practices in European Repo Markets,” Annex II - Repo Margining Best Practices, section 6-7, pages 64-65.
ICMA “ERC Guide to Best Practices in European Repo Markets,” Annex II - Repo Margining Best Practices, section 6-7, p64-65
ICMA “ERC Guide to Best Practices in European Repo Markets,” Annex II - Repo Margining Best Practices, page 69.

ASIFMA–ICMA Guide on Repo in Asia

The clearing agent (i.e. Clearstream, Euroclear, Domestic Agent, Fed wire / DTC, CREST) should be confirmed
between counterparties at the point of trade.50

2.		 Best practices in initiating a repo transaction
2.1.

Counterparty identification

Be certain of the identity of your counterparty - A party to a financial transaction is typically one of a number oflegal entities within a group, often with similar names. It is essential, for legal, regulatory, operational and credit risk
management purposes, that both parties to a transaction know the precise legal identity of their counterparty.
Best practice recommendation: Parties should determine the precise legal identity of their counterparty.51
A party can transact repos with another under the same Global Master Repurchase Agreement (GMRA) as either aprincipal (dealing in its own name and for its own benefit) or an agent (dealing in a client’s name and for the client’s
benefit). The legal relationship and risk exposure between principals is very different to that between a principal andan agent, or between two agents.
Parties should therefore make clear to each other, at the point of trade, on what basis they are dealing. In addition,
where one party is acting as an agent, they should both have signed the Agency Annex to the GMRA. If both parties
are acting as agents, they will have to seek legal advice, as the Agency Annex to the GMRA does not cover agentagent transactions.52
Best practice recommendation: Each party should make clear to the other, at the point of trade, if is acting as aprincipal or an agent.

2.2.

Communication and messaging standards

When negotiating by telephone or electronic messaging system, it is essential that the precise terms of a transaction are
clearly understood by both parties. On the telephone, there is a tendency towards the use of market slang. When typing
on an electronic messaging system, it is common to try to speed up conversation by using abbreviations (above andbeyond widely understood conventions such as ISO currency codes). Both practices can lead to confusion and parties
should avoid sacrificing clarity for speed. It is the responsibility of both parties to ensure that they understand fully theterms of a transaction and to insist on clarification from the other party where there is any uncertainty. On the telephone,
the key economic terms of a transaction should be listed by one of the parties at the end of the conversation. Posttrade checks should also be conducted using confirmations and affirmation (see paragraphs 2.7). Further, in a tri-party
arrangement, arrangement terms will be matched, and confirmations are necessary for tri-party repos.
Best practice recommendation: When negotiating by telephone or electronic messaging system, parties should
ensure that they understand fully the terms of a transaction and insist on clarification from the other party where there
is any uncertainty. On the telephone, the key economic terms of a transaction should be listed by one of the parties
at the end of the conversation. Post trade checks should also be conducted using confirmations and affirmation.53

2.3.

How to quote the price of a repo

Repurchase agreements are quoted in terms of the repo rate, that is, the percentage per annum rate of return on
the purchase price to be paid by the buyer to the seller on the repurchase date as part of the repurchase price. The
repo rate should be quoted on the basis of the day count/annual basis convention (also called the day count fraction
convention) prevailing in the wholesale money market in the currency of the purchase price (notably, the deposit andforward foreign exchange markets). This is almost always actual/365 days (A/365F) or actual/360 days (A/360). In
the GMRA, the repo rate is called the pricing rate.54

50
51
52
53
54

Barclay’s “Repo Market – Masterclass,” May 2014.
ICMA “ERC Guide to Best Practices in European Repo Markets,” page 7.
ICMA “ERC Guide to Best Practices in European Repo Markets,” page 7.
ICMA “ERC Guide to Best Practices in European Repo Markets,” page 7-8.
ICMA “ERC Guide to Best Practices in European Repo Markets”, section 2.4-2.5, p8.

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Section II - ASIFMA and ICMABest Practices across the Repo Trade Lifecycle

2.4.

How to quote the purchase priceParties to a repurchase agreement conventionally agree the purchase price of fixed-income securities in terms of thedirty price of the collateral (that is, including the accrued interest since the last coupon date). The purchase price ofa repurchase agreement also incorporates any initial margin or haircut.55

2.5.

Fixing the purchase and repurchase dates

Parties are able to vary the period between the date on which a repo is agreed (transaction date or T) and thepurchase date, when cash and collateral are exchanged. Depending on the currency, parties can agree to schedule
the purchase date on:• the same day as the transaction date (in which case, settlement is said to be ‘same-day’ or T+0);• the next business day (called ‘next-day’ or T+1 settlement);• the second business day after the transaction date (called ‘spot’ or T+2 settlement);• the third business day after the transaction date (T+3 settlement).
Any purchase date later than T+3 is now usually considered a forward repo in any currency.
The most common non-forward settlement period in the repo market is usually one business day shorter than themost common non-forward settlement period in the cash market for the same securities. This is because the net
cash positions that need to be financed and the net securities positions that need to be covered in the repo market
are only known after close of business on the cash market transaction date and therefore have one less business
day than the cash market to settle.
Where non-bank customers in the repo market are unable to deliver securities one day faster than is usually requiredfor cash settlement, dealers can agree to settle one business day later, in line with the cash market. This later repo
purchase date is known as a ‘corporate value date’. For the purchase date of forward repos, see paragraphs 2.5.1.
The repurchase date of a repo can be fixed in a variety of ways.
• For fixed-term repos, the repurchase date can be agreed in terms of:• a specific date; or• for round date maturities, using the Modified Following Business Day Convention and End/End Rule.
• For open repos, the repurchase date is not fixed on the transaction date but can be called at any time, by either
the buyer or the seller, subject to a minimum period of notice (see paragraphs 2.5.3).56
Business days: The purchase date and repurchase date of a repo must both be business days in the city in which
the currency of a repo is to be paid. If the city in which the currency is to be paid is different from the city in which thecollateral is to be delivered (eg in the case of cross-currency repos), the purchase date and repurchase date mustalso be business days in the latter city as well. The purchase date and repurchase date of a repo would also haveto be a business day in more than one city, if collateral has to be delivered between securities settlement systems(SSS) and/or custodian banks in different cities. Under the GMRA 2000 paragraph 2(e) and 2011 paragraph2(f), a
business day is defined as:• For repos to be settled at an SSS, any day on which that system is open for business;• For repos to be settled by delivery of securities at a custodian bank, any day on which that bank is open forbusiness, as well as a day on which banks generally are open for business in the city which hosts the central
bank payments system for the currency of the purchase price, or, a day when payments can be made in the local
settlement / payment system.
55
56

26

ICMA “ERC Guide to Best Practices in European Repo Markets”, section 2.6-2.7, p8.
ICMA “ERC Guide to Best Practices in European Repo Markets”, section 2.6-2.7, p9.

ASIFMA–ICMA Guide on Repo in Asia

A business day is defined as a day when payments can be made in the local settlement / payment system.
The definition in the GMRA does not specify when the business day ends. This can create uncertainty about when anotice served by one party on another (eg a default notice) comes into effect. It is therefore best practice for parties toagree times to be taken as close of business in the countries in which they are located, and in other relevant locations,and record these times in Annex I of their GMRA or, if that is not practical, in confirmations.
Best practice recommendation: It is best practice for parties to agree the times to be deemed as being the close ofbusiness in the countries in which they are located, and in other relevant locations, and record these times in Annex
I of their GMRA or, if that is not practical, in confirmations.
It is best practice for parties to agree on whether to include relevant domestic public holidays in the definition of abusiness day in Annex I of their GMRA or, if that is not practical, in confirmations.
Best practice recommendation: It is best practice for parties to consider whether to include relevant domestic public
holidays in the definition of business day in Annex I of their GMRA or, if that is not practical, in confirmations.57
Unless otherwise agreed between the parties, the day or days between but not including the transaction date andpurchase date should be business days in the city in which the currency of a repo is to be paid. If the city in which thecurrency is to be paid is different from the city in which the collateral is to be delivered, the day or days between but
not including the transaction date and purchase date must also be business days in the latter city as well. However,the day or days between the transaction date and purchase date do not have to be business days in the city or cities
in which the parties are located, if these are different from the cities in which payment and delivery are due, unlessthe parties agree otherwise.
The convention is summarised in the following table.
Which days should be business days in each relevant location?
location ofParty A

Party Bcurrency(central bankpayment system)

security
settlement
system(s)transaction date (T)

yes

yes

yes

yes

any Business Days
between T and
Purchase Datenot necessary

not necessary

yes

yes

Purchase Date

yes

yes

yes

yes

Repurchase Date

yes

yes

yes

yes

2.5.1 Forward repos
A forward repo is a transaction with a purchase date later than the most common purchase date in the currency ofthe purchase price. For example, since 6 October 2014, the purchase date of a forward repo in euros should be T+3
or later (except in the case of a repo for a corporate value date). For forward repos for which the periods from thetransaction date to the purchase date and repurchase date are both multiples of one month, there are two methodsof fixing these dates:• Method 1. Both dates should be the same date in the relevant future months as the conventionally-earliest
purchase date (unless this is not a business day, in which case, the modified following business day convention
57

ICMA “ERC Guide to Best Practices in European Repo Markets”, page 10.

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Section II - ASIFMA and ICMABest Practices across the Repo Trade Lifecycle

applies). For example, in euro, for which the conventionally-earliest purchase date is the spot date or T+2, a 1x3
forward repo would have a forward purchase date which is the same date one calendar month after the current
spot date and repurchase date which is the same date three calendar months after the current spot date. Thus,
assuming a currency which settles T+2, the dates for a 1x2 forward repo transacted on Wednesday, 4 September
2013, would be:• conventionally-earliest purchase date: (Friday) 6 September• 1-month purchase date: (Monday) 7 October 2013 (as 6 October 2013 is on Sunday)• 2-month repurchase date: (Wednesday) 6 November 2013.
• Method 2. The forward purchase date should be the same date in the relevant future month as the conventionallyearliest purchase date and the repurchase date should be the same date in the relevant future month as theforward purchase date (unless one or both of these dates are not business days, in which case, modified following
business day convention applies). Using the same example as above (a 1x2 forward repo in a currency which
settles T+2 transacted on Wednesday, 4 September 2013), the dates would be:• conventionally-earliest purchase date: (Friday) 6 September• 1-month purchase date: (Monday) 7 October 2013 (as 6 October 2013 is on Sunday)• 2-month repurchase date: (Thursday) 7 November 2013.
In contrast to the first method, the repurchase date in this second method is fixed by reference to the forward
purchase date of 7 October, not the spot value date of 6 September. Therefore, a change in the fixing of the forward
purchase date, because it is not a business day, would affect the fixing of the repurchase date. This would not be
the case in method 1.
The second method is recommended as best practice, as this ensures that the period between the purchase dateand repurchase date will have the same number of days as new non-forward transactions for the same purchasedate. The second method is the convention applied elsewhere in the money market. It is best practice for parties tospecify the use of this convention in Annex I of their GMRA or, if that is not practical, in confirmations.
Best practice recommendation: It is best practice to fix the purchase date of a forward repo at the same date in therelevant future month as the conventionally-earliest purchase date and to fix the repurchase date at the same date in
the relevant future month as the purchase date. Therefore, a change in the fixing of the purchase date, because it is
not a business day, would affect the fixing of the repurchase date.58
2.5.2.	 Floating-rate repos
Floating-rate repos can be linked to money market indexes, commonly LIBOR, or overnight index swaps (OIS) fixings
depending on currencies. . It is convention for such transactions to pay interest at the end of each interest rate period.
For example, a repo indexed to 3-month USD LIBOR would conventionally pay repo interest every three months.
The market convention for fixing the dates here is different to that described for fixing the dates of forward repos inparagraphs on “Forward repos” above. For example, for interest rate periods which are multiples of one month, thestart of all future periods should be the same dates in the relevant future months as the purchase date, unless thata future date is not a business day, in which case, the modified following business day convention and end/end rulewould apply to this date. This convention ensures that the day counts of the second and subsequent interest rate
periods are not shortened by the deferral of the starting dates of earlier periods because of the occurrence of nonbusiness days. This would have the undesirable effect of progressively compressing periods as one approached thefixed final repurchase date.
2.5.3.	 Open repos
In the GMRA, this type of repo is called an ‘on demand’ transaction. An open repo is initiated without fixing a
repurchase date. Instead, either party may terminate the transaction (in whole or in part) by giving agreed notice tothe other. The GMRA states that termination shall ‘occur after not less than the minimum period as is customarily
58

28

ICMA “ERC Guide to Best Practices in European Repo Markets,” pages 11-12.

ASIFMA–ICMA Guide on Repo in Asiarequired’ for delivery (GMRA paragraph 3(e)). When negotiating an open repo, it is essential that the parties have thesame understanding about what is the customary delivery period for the collateral. It is also essential that they havethe same understanding of what the deadline is (and in which time zone) for giving the notice of termination. Noticegiven after this deadline will not be effective on the same day, in other words, the return of equivalent collateral will
not be initiated until the next business day. It is best practice for the parties to agree the delivery period and deadline.
Best practice recommendation: It is best for the parties to an open repo of less commonly-used collateral to agree
the delivery period and deadline for serving a termination notice and to document their understanding in Annex I of
their GMRA or, if that is not practical, in confirmations.59
It is possible that a dispute may arise about whether a deadline applies to the sending or receiving of the notice oftermination. Parties should avoid such disputes by acting reasonably and in good faith. It is best practice, if giving
notice at a time close to the agreed deadline, to ensure that the other party is aware of the notice. This could be done
by giving notice by telephone, rather than by electronic messaging, so that there is no uncertainty about whether theother party received notice before the deadline.
Best practice recommendation: It is best practice, when giving notice to terminate an open repo at a time close to
the agreed deadline, to ensure that the other party is aware of the notice. This could be done by telephone, rather
than by electronic messaging, so that there is no uncertainty about whether the other party received notice. It is also
best practice for parties to document the term nation requirements on open repos in Annex I of their GMRA or, if thatis not practical, in confirmations.60
Parties need to be sure about when equivalent collateral will be returned to the seller and the repurchase price will
be paid to the buyer following a termination. Unless this is specifically documented in Annex I of their GMRA or in
confirmations, the default under the GMRA will be ‘not less than the minimum period as is customarily required forthe settlement or delivery of money or equivalent securities of the relevant kind’ (GMRA 2000/2011 paragraph 3(e)).
Parties need to consider whether this provides sufficient certainty.61

2.6.

Agreeing interest rates for late payments

The standard provision in the GMRA 2000 (paragraph 12) is that the interest rate on late payments should be thehigher of the repo rate on a particular transaction and 1-month LIBOR. However, parties are free to agree anotherrate. In this case, it is best practice for the parties to agree such a rate before trading and to record this rate in Annex
I of their GMRA. In the GMRA 2011 (paragraph 12), the default rate is the higher of the repo rate on a particulartransaction and an agreed ‘Applicable Rate’, which should be recorded in Annex I. It is also best practice for parties
to agree an interest rate on late payments that reflects only the need of the party suffering late payment for economic
compensation. The interest rate on late payments should not be used to penalise the other party.
Best practice recommendation: Where parties decide to agree an interest rate to apply to late payments, it is bestpractice to do so before trading and to record the rate in Annex I of their GMRA. It is also best practice for parties toagree an interest rate on late payments that reflects only the need of the party suffering late payment for economic
compensation. The interest rate on late payments should not be used to penalise the other party.62
Where a late payment by one party has caused the cash account of the other at an International Central
Securities Depository (ICSD) to go into deficit and suffer an overdraft charge, the practice has developed ofpassing that charge back to the first party, regardless of the fact that the parties have accepted the standard
provision of the GMRA. If parties to a repo wish to be able to pass on overdraft charges incurred because of alate payment by their counterparties, it is best practice to do so by including a supplementary term to this effectin Annex I of their GMRA.

59
60
61
62

ICMA “ERC Guide to Best Practices in European Repo Markets,” pages 14-15.
ICMA “ERC Guide to Best Practices in European Repo Markets,” page 15.
ICMA “ERC Guide to Best Practices in European Repo Markets,” page 15.
ICMA “ERC Guide to Best Practices in European Repo Markets,” page 18.

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Section II - ASIFMA and ICMABest Practices across the Repo Trade Lifecycle

Best practice recommendation: If parties to a repo wish to be able to pass on overdraft charges incurred at an ICSD
because of a late payment by a counterparty, it is best practice to do so by including a supplementary term to thiseffect in Annex I of their GMRA.63

2.7.

Verifying the terms of transactions

Once a transaction has been agreed, it is best practice for each party to verify that its understanding of the terms ofthe transaction is the same as the other party’s. A post-trade process of verification should be performed promptly
after the execution of a contract, which means as soon as possible on the same day. Prompt same-day verificationis required in order to give the maximum opportunity to correct any mistakes made in recording the terms of atransaction or resolve any disagreements over the agreed terms, if necessary, by agreeing to terminate the transaction.
Such promptness is particularly essential in order to be able to verify the details of transactions requiring overnight
settlement.
The later that mistakes or disagreements are discovered, the more difficult and expensive it will be to repair andreprocess transactions. Until mistakes or disagreements are identified and addressed, the parties will be exposed to
unexpected market and liquidity risks. Regulators are pressing for record-keeping to be accurate and complete on
the transaction date, in order to improve risk management by firms and to allow more effective prudential supervision.
Verification of the terms of a transaction can be done by means of confirmation and, if necessary, affirmation.
Confirmation is the process of providing a complete record of the commercial terms of a transaction and settlement
instructions to the other party. Either, the parties exchange confirmations or, by agreement, one party sends a
confirmation to the other. The provision of a confirmation allows the recipient to cross-check the sender’s record of
the terms of a transaction against the recipient’s own records.
Confirmations play a key role in the legal construction of a transaction. Whereas, the GMRA and Annex I set out thegeneral terms and conditions of the business relationship between the parties, a confirmation describes the terms
and conditions specific to the transaction. The content of confirmations should be consistent with the GMRA andrefer to the same terms (eg Pricing rate, not repo rate). Annex II of the GMRA provides a form of confirmation (whichis reproduced in Annex III of this Guide). A confirmation would be regarded as prima facie evidence of the terms of atransaction. In the event of a conflict between the terms of such confirmation and the GMRA, the confirmation shallprevail in respect of that transaction and those terms only. It is best practice therefore for parties to promptly compare
a confirmation received from the other party with their own records and to revert to the other party urgently, on thetransaction date, if there are any differences.
For transactions executed over an automatic repo trading system, bilateral confirmations may be substituted by the
notifications or records generated by the trading system. Parties need to ensure that such notifications or records
provide the information that would otherwise be contained in a confirmation. If not, confirmations should be sent
between the parties.
Best practice recommendation: It is best practice for parties who wish to substitute confirmations with notifications orrecords generated by an automatic trading system to ensure that such notifications or records provide the informationthat would otherwise be contained in a confirmation.64
The essential terms which should be included in a repo confirmation (which are set out in GMRA paragraph 3(b) and/or Annex II of the GMRA) are:• Transaction date
• Collateral (including ISIN or other identifying code)• Nominal value of collateral

63
64

30

ICMA “ERC Guide to Best Practices in European Repo Markets,” section 2.31-2.32, p18-p19.
ICMA “ERC Guide to Best Practices in European Repo Markets,” pages 23-24.

ASIFMA–ICMA Guide on Repo in Asia• Precise legal identities of the buyer and seller• Purchase date
• Purchase price• Currency of the purchase price• Repurchase date or confirmation that the transaction is an open repo
• Repo rate (Pricing rate) in the case of a repurchase agreement• Settlement instructions, including the bank accounts of the buyer and seller• Where the Agency Annex has been signed, confirmation of whether the transaction is an agency transaction or
between principals and, if it is an agency transaction, which party is the agent and the identity of the principal(s)in terms of name or code
• Any additional terms.
Where a party has agreed to send confirmations, it is best practice that, subject to applicable laws and regulations,such confirmation be made through an electronic communication system agreed between the parties or, in theabsence of such an agreement, such electronic medium as the party who is under the obligation to confirm maychoose, provided that the confirmation is capable of being promptly and accurately reproduced on paper.65

2.8.

Affirmation process

Affirmation is a process in which (1) one party contacts the other by telephone or e-mail on the transaction date, assoon as possible after the execution of a transaction, in order to secure immediate verification from the other party ofat least the key economic terms of a transaction and the settlement instructions, or (2) both parties report batches oftransactions to a third-party affirmation service for automatic comparison. Affirmation is performed where the checking
of a confirmation is not practicable.
Because affirmation by telephone or e-mail is a manual process, it may not be practicable to affirm all transactions or
events. Instead, such bilateral affirmation may be applied only to certain counterparties or to riskier transactions, which
may include less creditworthy counterparties, riskier collateral, larger size, longer duration or complicated structures
requiring economic decisions to be made in the future. Automated third-party affirmation services should make itpossible to affirm all repos, an objective which is highly desirable.
Typical terms to be affirmed are:• transaction date
• purchase date
• repurchase date or whether the repo is open
• collateral (ISIN)• nominal value of collateral• market value of collateral• purchase price• repo rate or, for open and floating-rate repos, interest rate index and spread• currency of purchase price• counterparty• buy or sell
• settlement account(s)65ICMA “ERC Guide to Best Practices in European Repo Markets,” page 22.

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Section II - ASIFMA and ICMABest Practices across the Repo Trade Lifecycle

Affirmation is also used during the life of a transaction to verify changes in its terms, either an update of a variable
term (eg re-fixing the repo rate on a floating-rate repo) or an amendment (eg the early termination of a transaction).
Typical changes include:• Early termination (eg termination of an open repo, mini close-out, fails)• Change in repo rate or re-fixing of an interest rate index (for open and floating-rate repos)• ISIN for new collateral after a substitution66

2.9.

Importance of confirmations

Unless both parties exchange confirmations, one party could not prove that the other received a confirmation in theevent that there was a disagreement about the terms of a transaction. Where it is agreed that confirmations will be
exchanged, any problem would automatically become apparent to both parties. A party not receiving, or claiming not
to have received, a confirmation by the end of the transaction date could reasonably have been expected to request
the other party to re-send the confirmation. Where a party agrees that its counterparty does not have to send a
confirmation, it is good practice for it to affirm these transactions (but best practice is the affirmation of all transactions).
Otherwise, it is exposed to the risk that any queries by the other party may be too late to avoid disputes.
It is best practice for transactions to be confirmed and, if desired, affirmed by the operations departments of theparties, not by their trading desks. This is in order to ensure the proper segregation of functions.
Best practice recommendation: It is best practice for each party to verify that its understanding of the terms of atransaction is the same as the other party’s, by means of confirmation and, if necessary, affirmation. Verification
should be performed promptly after the execution of a contract, which means as soon as possible on the same day.
Subject to applicable laws and regulations, such confirmation should be made through an electronic communication
system agreed between the parties or, in the absence of such an agreement, such electronic medium as the party
who is under the obligation to confirm may choose, provided that the confirmation is capable of being promptly andaccurately reproduced on paper. A party should promptly compare a confirmation received from the other party with
their own records and revert to the other party urgently, on the transaction date, if there are any differences. It isbest practice to affirm all transactions where only one party is obliged to send confirmations. Transactions should be
confirmed by operations departments.67
A template for transaction confirmations for cross-border repo trades can be found in Annex III, which is the form ofconfirmation used in GMRA (Annex II of GMRA).
In the event of bespoke structured transactions, the GMRA lends itself to verification through the use of longform confirmations.

2.10.

Recommended delivery size

It is best practice to divide or ‘shape’ instructions for the delivery of a large amount of collateral into smaller deliveries or‘shapes’, so as to reduce the economic impact of settlement failures. However, while such partial delivery is helpful inmitigating the economic impact of settlement problems, it does not change the legal obligation on the delivering party
to deliver the full agreed amount of collateral and the other party is within its rights to decline a partial delivery. Shaping
is therefore different from ‘partialling’, where the parties have agreed to accept partial deliveries in part fulfillment of
their contract.
Best practice recommendation: It is best practice to divide instructions for the delivery of large amounts of collateral
into ‘shapes’.68

66
67
68

32

ICMA “ERC Guide to Best Practices in European Repo Markets,” page 22.
ICMA “ERC Guide to Best Practices in European Repo Markets,” section 2.33-2.45, p18-p23.
ICMA “ERC Guide to Best Practices in European Repo Markets,” section 2.46, p23.

ASIFMA–ICMA Guide on Repo in Asia

2.11.

Anticipating problems that may be caused by low or negative repo rates

Repo is the only instrument where rates of return can become negative in normal market conditions. Repo rates
become negative when a particular collateral asset is subject to exceptional borrowing demand in the repo market
and/or reduced supply, and goes on special. Very low, zero or negative rates become more common when thegeneral level of interest rates (including the general collateral (GC) repo rate) is low. It is also possible for GC repo
rates to become negative during a period of financial stress, if the whole basket of general collateral in a particularcollateral market is subject to exceptional demand because the underlying securities, which are typically government
securities, are seen as a safe haven. A negative repo rate means that the buyer (the cash lender) effectively pays
repo interest to the seller (the cash borrower), because the repurchase price will be lower than the purchase price.
Problems can arise, because the GMRA was designed only with positive repo rates in mind. Parties need to be awareof these problems.
If a seller fails to deliver collateral on the purchase date of a repo, he will not receive or be able to retain thepurchase price until he does deliver. However, the seller will remain obliged to pay the full amount of repo interest to
the buyer at the repurchase date, even if he delivers the collateral late and therefore has delayed use of the cash,
or even if he never delivers the collateral and therefore never has use of the cash. Having to pay interest without
having the use of cash is a cost that provides an incentive to the seller to remedy a failure to deliver, as well ascompensation to the buyer.
At negative repo rates, the automatic cost of failing to deliver collateral becomes a perverse incentive to fail. Given
that the repo contract remains in force in the event of a failure to deliver by the seller (unless the buyer chooses toterminate the transaction), the seller is obliged to pay a repurchase price to the buyer on the repurchase date which,in this case, is lower than the purchase price which the buyer is obliged to pay to the seller on the purchase date.
Thus, the seller is rewarded for his failure. To eliminate the perverse effect of negative repo rates, the ICMA issued arecommendation in November 2004 on behalf of the ERC that, when the seller fails to deliver on the purchase dateof a negative rate repo, the repo rate should automatically reset to zero until the failure is cured, while the buyer has
the right to terminate the failed transaction at any time. Subsequently, this recommendation has been included as an
optional supplementary condition in Annex I of the GMRA 2011. For parties using the GMRA 2000, it is best practiceto adopt the ICMA recommendation by an agreed amendment to the GMRA or, if that is not practicable, by inclusion
in confirmations. For parties using the GMRA 2011, it is best practice to elect to include the supplementary condition
in Annex I.
Best practice recommendation: For parties using the GMRA 2000, it is best practice to adopt the ICMA recommendationof November 2004 on failure to deliver in repos at negative rates by an agreed amendment to the GMRA or, if that is
not practicable, by inclusion in confirmations. For parties using the GMRA 2011, it is best practice to elect to include
the supplementary condition on failure to deliver for repos at negative rates in Annex I.
Given that the repo rate (C) is used as the reinvestment rate for equivalent income payments, if that rate is negative,
reinvestment will erode the value of the equivalent income payment. This does not make sense. The repo rate is
typically negative only because it implicitly incorporates a borrowing fee for the collateral that reflects the specialnessof the collateral. Cash reinvestment rates should be close to the GC repo rate or some other money market rate forthe short-term borrowing or lending of cash. Otherwise, the buyer is paying a hidden, additional fee for borrowing
a special. It is best practice for parties to adopt an agreed amendment to their GMRA or, if that is not practicable,
include a supplementary term in their confirmations, unless they are content with that possibility, or they are willing toaccept a negative reinvestment rate (for example should the general interest rate level, as represented by the relevant
GC repo rate or official policy rate, also become negative). Otherwise, they could agree an alternative reinvestment
rate to the repo rate.

2.12.

Calculating floating-rate repo interest payments

In the case of floating-rate repos linked to overnight (OI) or tom/next (TN) interest rate indexes; interest is not paid
during the term of the repo but is accrued until the final repurchase date. Nor is the daily interest compounded.
Instead, an arithmetic average is calculated. For a floating-rate repo with a day count of n:

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Section II - ASIFMA and ICMABest Practices across the Repo Trade Lifecycle(R x D ) + (R x D ) + ... + (R x D )
(
)x n
n
1+
1

Repurchase Price = Purchase Price x

1

2

2

n

n

100 x B

where:
R1

is the per annum index fixing for day 1

R2

is the per annum index fixing for day 2

Rnis the per annum index fixing for day n

D1

is the number of days to which index fixing R1 applies (normally 1 for a weekday and 3
for a weekend)

D2is the number of days to which index fixing R2 applies

Dnis the number of days to which index fixing Rn applies

nis the number of days in the term of the transaction (ie day count)B

is the annual basis (ie assumed number of days in the year)

Where the term of a repo crosses one or more non-business days, the OI fixing on the last business day isapplied to the non-business day(s). For example, Friday’s fixing will be applied to the Saturday and Sunday of
a normal weekend.
The repurchase price of a floating-rate repo linked to an OI cannot be paid until the final OI is fixed. The problem isthat OI are published after close of business, which may be too late to send settlement instructions to the appropriate
CSD or ICSD in time for settlement on the repurchase date. If the fixing of the OI is not too late, then Method 1 below
is used. Method 1 is best practice.
Worked example of Method 1 for 1W USD 100 million repo at ON LIBOR
Day count

ON LIBOR fixing

ON LIBOR applied

Thu 13-Nov 2014

1

0.09390 %0.09390 %Fri 14-Nov 2014

3

0.09400 %0.09400 %Mon 17-Nov 2014

1

0.09450 %0.09450 %Tue 18-Nov 2014

1

0.09640 %0.09640 %Wed 19-Nov 2014 1

0.09850 %0.09850 %Thu 20-Nov 2014

Repurchase Price = 100,000,000= 100,001,848.06

Payment

crystallisation day
1848.06

0.0939+(0.094x3)+0.0945+ 0.0964+ 0.0985
(
)x 7
7
1+
100 x 360

If the fixing of the OI is too late to send settlement instructions to the appropriate CSD or ICSD in time forsettlement on the repurchase date, then Method 2 below is used. Method 2 has traditionally been used in the
cross-border market, where it has not always been possible to send instructions to the CSD or ICSD on thebusiness day before the repurchase date (R-1, where R is the repurchase date) in time for settlement the nextday. Instead, the OI fixing on R-2 is also applied to R-1. Method 2 is becoming less common as settlement
infrastructure improves.

34

ASIFMA–ICMA Guide on Repo in Asia

Worked example of Method 2 for 1W USD 100 million repo at ON LIBOR
Day count

ON LIBOR fixing

ON LIBOR applied

Thu 13-Nov 2014

1

0.09390 %0.09390 %Fri 14-Nov 2014

3

0.09400 %0.09400 %Mon 17-Nov 2014

1

0.09450 %0.09450 %Tue 18-Nov 2014

1

0.09640 %0.09640 %Wed 19-Nov 2014 1

0.09850 %0.09640 %Thu 20-Nov 2014
Repurchase Price = 100,000,000= 100,001,842.22

Payment

crystallisation day
1842.220.0939+(0.094x3)+0.0945+(0.0964x2)
(
)x7
7
1+
100 x 360

Note that, in the example above of Method 2, the fixing on 19 November is not used as the final fixing. Instead, thefixing on 18 November is repeated. The latter is said to be the “crystallisation day”. In Method 1, the sequence of
LIBOR is said to be “crystallised” into a fixed rate on the business day before the repurchase date (R-1). In Method 2,
the sequence of LIBOR is said to be crystallised into a fixed rate two business days before the repurchase date (R-2).
Best practice recommendation: It is best practice, when calculating the repurchase price of a floating-rate repo linked
to an overnight index, to apply the rates fixed and published for each and every business day, rather than repeatinga previous day’s fixing for the last day.
It is best practice to confirm in writing the method of calculating the repurchase price of a floating-rate repo aheadof trading.
Best practice recommendation: It is best practice to confirm in writing the method of calculating the repurchase priceof a floating-rate repo linked to an overnight index ahead of trading.
Under Method 2, there will obviously be a discrepancy between the repurchase price that is calculated and settled by
the parties, and the repurchase price that would have been paid had it been possible to apply the correct OI fixings
for each and every day. Such discrepancies are usually insignificant, particularly for very short-term transactions, andwill tend to be written off by the parties.
However, for longer-term transactions, this may not be the case and parties may agree to make a retrospective
reimbursement for any difference between the actual and correct repurchase prices. Such a term should be agreed
at the point of trade. It is best practice to document this agreement and the deadline for reimbursement in theconfirmation of the transaction, and for any reimbursement to be made on the business day immediately following
the repurchase date. In any event, reimbursement should be made no later than 30 days after the repurchase date.
It is also recommended that, where several reimbursements are to be claimed on the same day, they should beclaimed in aggregate, rather than separately for each transaction. The aggregate claim per day usually depends on
counterparties and should not be for less than about USD 500 or the approximate equivalent in other currencies.
Best practice recommendation: Where the repurchase price of a floating-rate repo indexed to an overnight index
has to be calculated before the fixing and publication of the final rate and the parties decide to make retrospective
reimbursements for any difference between the actual and correct repurchase prices, it is best practice to document
this agreement and the deadline for reimbursement in the confirmation of the transaction, and for any reimbursement
to be made on the business day immediately following the repurchase date, but no later than 30 days later. Where
several reimbursements are to be claimed on the same day, a single aggregate claim should be made, rather thanseparate claims for each transaction. The aggregate claim per day usually depends on counterparties and should not
be for less than about USD 500 or the approximate equivalent in other currencies.
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Section II - ASIFMA and ICMABest Practices across the Repo Trade Lifecycle

If a TN index is used instead of an OI, because a TN rate is fixed one day in advance of the day to which it applies,
there is no problem about sending the necessary settlement instructions to the relevant CSD or ICSD in time for the
repurchase to be made on the repurchase date. Therefore, only Method 1 should be used.
Some floating-rate repos are linked to term indexes such as USD LIBOR (other than the ON or TN LIBOR indexes). In
contrast to repos linked to OI or TN indexes, it is convention to pay the repo rate at the end of each floating interest
rate period. For example, a repo indexed to 3-month LIBOR would conventionally pay repo interest every threemonths. The convention for fixing the repurchase dates of floating-rate repos is described in paragraph “floating-rate
repos” above).
Floating-rate repos require the monitoring and recording of floating-rate indexes, sometimes over extended periods. In
order to avoid operational error, it is best practice to confirm or affirm a new floating rate ahead of the period to which
it will apply (see paragraphs 2.7).69

2.13.

Calculating open repo interest payments

When an open repo is transacted, a repo rate close to the overnight rate will be agreed by the parties. That rate will
not change unless and until the parties agree a new rate. Either party may propose a change in the rate. Agreement
to update the repo rate (often called ‘re-pricing’ the repo) must be made before the agreed deadline for terminationof the transaction in order for the change in rate to take effect on the next business day. It is best practice to confirm
or affirm such changes.
Unless otherwise agreed, the interest on an open repo accrues daily until payment without compounding.
Worked example: calculating the interest on an open repo
Consider an open repo with a purchase price of USD 10 million that runs from Tuesday, 6 August, to the following
Thursday, 15 August (seven business days but nine calendar days). The initial repo rate is 0.75% but this is changed
on Monday to 0.55%. The total interest due on the repo is:0.75 x 1
0.75 x 1
0.75 x 1
0.75 x 3+		+ 		
+
100 x 360
100 x 360
100 x 360
100 x 360
			= 10,000,000								0.55 x 1
0.55 x 1
0.55 x 1+		+ 		
100 x 360
100 x 360
100 x 360

= 1,708.33

As open repos may run for extended periods, it is customary to make regular periodic payments on continuingtransactions. This is typically done monthly, usually after the end of each calendar month and in aggregate for all
open repos between the same parties running during the calendar month. Parties to open repos should agree thefrequency and date for payment when negotiating such transactions in Annex I of their GMRA or, if that is not practical,
in confirmations.70

3.		 Best practices in managing the life cycle of a repo
3.1.

Managing collateral in repo transactions

3.1.1.	 Allocation of collateral in a general collateral (GC) repo
In general collateral (GC) repos which have not been executed on an automatic repo trading system and/or are
not being settled across a tri-party collateral management system, it is best practice for the seller to notify thebuyer of the collateral which he proposes to deliver as soon as possible after execution and no longer than one
hour later.

69
70

36

ICMA “ERC Guide to Best Practices in European Repo Markets,” section 2.54-2.63, p28-p32.
ICMA “ERC Guide to Best Practices in European Repo Markets,” section 2.64-2.66, p32-p33.

ASIFMA–ICMA Guide on Repo in Asia

Best practice recommendation: In general collateral (GC) repos in which the seller selects the collateral to be delivered
to the buyer, it is best practice for the seller to notify the buyer of the identity of the collateral which he proposes todeliver as soon as possible after execution and no longer than one hour later.71
3.1.2.	 Agreeing the price of collateralIn repos which have not been executed on an automatic repo trading system and/or are not being settled across a triparty collateral management system, it is best practice for the parties to agree the price or prices to be used to value
the collateral as soon as possible after execution and no longer than 15 minutes later. The value for a fixed-income
security should include the outstanding accrued interest on that security.
Best practice recommendation: In general collateral (GC) repos in which the seller selects the collateral to be delivered
to the buyer, it is best practice for the parties to agree the price or prices to be used to value the collateral as soon
as possible after execution and no longer than 15 minutes later.72
3.1.3.	 Fixing an initial margin or haircut
Initial margins and haircuts are tools to mitigate risk associated with liquidating collateral in the event of a counterparty
default. Therefore, initial margins or haircuts are used to anticipate the loss that may be experienced if there is anadverse move in the collateral price during the close-out period.73 A haircut is based on several factors, including: (i)the volatility of collateral; (ii) close-out period of 10 days (i.e. assumes it would take 10 days to liquidate the collateral);(iii) counterparty credit worthiness; (iv) tenor of the repo (as longer-dated transactions can have different levels ofvolatility); (v) and the correlation between the collateral and counterparty.
Haircut method is the main methodology and most widely used for calculating a haircut:
Market value of collateral - Purchase price
Haircut = 					
x100Market value of collateral• HC is a percentage discount deducted from the market value of a security that is being offered as collateral in a
repo in order to calculate the purchase price.
• Haircuts are therefore expressed as the percentage difference between the market value of the collateral and thepurchase price of the repo.
Worked example: applying a haircut
Collateral worth USD 20 million is repoed out subject to a haircut of 5%. The purchase price would be
20,000,000 x (1 - 0.05) = 19,000,000
Because an initial margin is expressed relative to the purchase price, while a haircut is a percentage of the market
value of collateral, the arithmetic of initial margins and haircuts is slightly different. For example, an initial marginof 102% is not equivalent to a haircut of 2%, but to one of 1.961% (ie 100/102%). The difference can become
substantial for high initial margins and deep haircuts.
Initial margins and haircuts are likely to be agreed at the point of trade, in which case, it is best practice to record theinitial margin or haircut in the confirmation.
Best practice recommendation: It is best practice to record the initial margin or haircut in writing. If agreed at the pointof trade, an initial margin and haircut should be recorded in the confirmation.74
71
72
73
74

ICMA “ERC Guide to Best Practices in European Repo Markets,” section 2.20, p15.
ICMA “ERC Guide to Best Practices in European Repo Markets,” section 2.21, p16.
Barclays, “Repo Market – Masterclass,” May 2014.
ICMA “ERC Guide to Best Practices in European Repo Markets,” section 2.22-2.27, p16-p18.

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Section II - ASIFMA and ICMABest Practices across the Repo Trade Lifecycle

3.2.

Collateral substitution

3.2.1.	 Agreeing rights of substitution
Rights of substitution must be clearly defined at trade inception.
A buyer in a repo may grant the seller one or more rights to substitute some or all collateral during the term of the repo.
This permits the seller, at any time between the purchase date and repurchase date, to call for the buyer to return
equivalent collateral in exchange for substitute collateral. In return for this right, the seller will usually agree to pay ahigher repo rate. Where there is more than one right of substitution, the exercise of the second and any subsequent
rights will result in the substitution of previous substitutes. See paragraphs 3.7.5 on exercising a ‘mini close-out’ inresponse to a failure to deliver on the repurchase date below.
It is best practice to record the original number of rights of substitution in the initial confirmation of the transaction andto confirm each substitution, noting the number of rights of substitution remaining.
Best practice recommendation: It is best practice to record the original number of agreed rights of substitution in
the initial confirmation of a transaction and to confirm each substitution thereafter, noting the number of rights ofsubstitution remaining.
When negotiating rights of substitution, it is necessary to agree:• The total number of substitutions to be allowed.
• The deadline for the seller to give notice of substitution for earliest delivery.
• The delivery period for the return of the equivalent collateral and the delivery of the substitute.
• Whether substitute collateral should have at least the same market value or nominal value as the collateral being
substituted. See 8(a) of the GMRA.
• To the extent possible, what are acceptable and/or unacceptable substitute securities.75
3.2.2.	 Exercising agreed rights of substitution
Ideally, substitution should be performed by means of a simultaneous delivery versus-delivery (DVD) exchange ofthe equivalent collateral and substitute collateral; or by back-to-back (delivery-versus-payment) DVP deliveries7.
However, DVD and even back-to-back DVP deliveries are often not possible or practicable, in which case, it is usual
for the seller to deliver the substitute before the buyer releases the existing collateral. This of course exposes the seller
to credit risk on the buyer.
Although the seller may have an agreed right of substitution, the buyer is not obliged to accept any substitute offeredby the seller. To insist otherwise might jeopardise the validity of the outright transfer of legal title to the collateral fromthe seller to the buyer. The substitute should be at least of the same value and at least of the same quality in termsof credit and liquidity. If a disagreement arises over the acceptability of a particular proffered substitute security,
the parties should negotiate reasonably and in good faith. Disputes can be avoided if security issues or classesof security that would be acceptable or which would not be acceptable to the buyer as substitutes are agreed inadvance in writing (see paragraph 3.2.1 above).
Rights of substitution can be sought not only by the seller from the buyer, but parties can agree rights of substitution
on margin securities held by either.76

3.3.

Margining best practices

3.3.1.	 Importance of two-way margining
The application of margin requirements over the term of the repo should be implemented both ways to mitigate
75
76

38

ICMA “ERC Guide to Best Practices in European Repo Markets,” section 2.28-2.30, p18.
ICMA “ERC Guide to Best Practices in European Repo Markets,” section 3.7-3.9, p36.

ASIFMA–ICMA Guide on Repo in Asia

credit risk, whereby both counterparties anticipate the loss of value that may be experienced if the collateral has tobe liquidated following an event of a counterparty default. Net exposure ought to be calculated on a daily basis, with
margin calls being implemented two-ways for counterparties to mitigate credit risk on each other. A net exposure isan unsecured credit exposure and should be below the parties’ pre-agreed margin threshold as well as be subject
to the credit limit for repo.
Even though master repurchase agreements (such as the GMRA) stipulate the legal obligations for counterparties tocalculate net exposure and make margin calls on a daily basis, many practitioners in Asia lack the operational capabilities
in place to meet such obligations. However, foregoing such margining protocols would leave net exposures on one
party’s trading book. Thus, it is best practice for market practitioners to enhance operational capabilities to properly
assess and meet the demands of increased collateral requirements and higher frequency of margin calls, and toenhance collateral mobility as part of a holistic view of liquidity, operational and credit risk management processes.
3.3.2.	 Margin conventions
Cash or collateral margin is preferred over repricing (see section 3.4) a trade. Both cash and collateral margining are
best practices methods adopted by the market participants using mutually agreeable cash or securities.
Repricing, although it has the same effect as a margin call, is not the preferred market standard. Parties can mutuallyagree to reprice, which changes the purchase price of a repo instead of the market value of collateral. Under thismethod, it is possible for the parties to agree a complete or partial substitution of collateral. By netting, repricing
achieves a margin transfer of cash and is an alternative to margin maintenance.77 And some banks have a policy toreprice open trades on a monthly basis to keep prices fresh.
Also, margin calls require delivery of collateral/cash to a margin account to cover exposure without the need to alteror close and reopen the original trade; therefore there is less chance of instructions in the market being mismatchedand fail.
Timing for margin calls and payments have been addressed at paragraphs on “1.1.6. Deadlines for margin calls
and payments”.
Best practice recommendation: It is best practice to adopt cash or collateral margining.
3.3.3.	 Margin call timing (for relevant currencies)
A margin call should be made when one party has a net exposure to the other (see section 4(c) of GMRA 2000 and2011). A net exposure arises when the aggregate exposure of one party to another exceeds the aggregate exposureof the second party to the first. The aggregate exposure of each party is equal to the sum of the exposures on eachtransaction still outstanding with the other party (Transaction exposure – see section 2(ww) of GMRA 2000 and
2(xx) of GMRA 2011) plus any income due from the other party but unpaid (ie manufactured payments and interest
payments) plus net margin still held by the first party.
Transaction exposure is calculated by marking each transaction to market. The mark-to-market calculation depends
on whether the transaction is subject to an initial margin or to a haircut. In the interval between a margin call being
made by one party and margin being delivered by the other, the calculation of net exposure should assume thatmargin will be delivered.
1. where the collateral is subject to an initial margin
Transaction Exposure =77

initial margin
Repurchase Price		
100- Market Value of collateral

ICMA “ERC Guide to Best Practices in European Repo Markets,” page 93.

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Section II - ASIFMA and ICMABest Practices across the Repo Trade Lifecycle

Repurchase Price = Purchase Price1+

repo rate x day count
100 x annual basis

The repurchase price should be calculated for the day on which margin is due to be delivered (the margin deliverydate). In other words, the day count for the repo rate should be the number of days up to but excluding the margindelivery date.
Market Value of collateral = nominal valueclean price +coupon x day countannual basis
100

2. where the collateral is subject to a haircut

Transaction Exposure = Repurchase Price - Market Value of collateral1-

haircut
100

The day count and annual basis for the calculation of repurchase price follows the money market (ie deposit or
forward FX) convention for the relevant currency (eg actual/360 for EUR, USD, CHF and JPY, and actual/365 for
GBP). The day count and annual basis for the calculation of the accrued interest in the market value of collateralfollows the bond market convention for the relevant currency and security.
3.3.4.	 Mark-to-market conventions in margin maintenance
Price sources to be used to value collateral, either routinely or in the event of a margin dispute, as well as whether
the middle or bid rate will be used in the valuation of collateral, should be agreed before trading in order to reducemisunderstandings and margin disputes (see 1.1.9). Further, in the event the desired outcome after completion of
the practices described in 1.1.9 is not achieved, reference can also be made to a standard of reasonableness andgenerally accepted pricing to those pricing listed on platforms of data providers. It is also suggested to mutually selecta number (1-3) of dealers to price a disputed collateral and to take the midpoint of the prices. The mark-to-market
practices are generally based on GMRA provisions where specifics of the arrangements are up to the discretion of
the two parties conducting the transaction.
3.3.5.	 Transactions that are included in the calculation of net exposure78
a. General rule:
The calculation of net exposure should include all transactions between two parties for which:• The purchase date is today or earlier; and• The repurchase date is today or later.
The inclusion of new or maturing transactions should be based on actual rather than assumed settlement. However,this practice requires firms to have the ability to confirm settlement before making or responding to a margin call.
Where firms cannot confirm settlement before making or responding to a margin call, then the above general ruleshould be applied literally. In other words, transactions should be included in the calculation of net exposure on boththeir purchase date and repurchase date. This means assuming settlement on the purchase date but not on the
repurchase date. The reason for this asymmetry of treatment is that settlement failures on the repurchase date are
more common and are likely to have larger transaction exposures than new transactions. Transactions which fail on
their purchase date should be removed from the calculation of net exposure on next business day and not included
78

40

ICMA “ERC Guide to Best Practices in European Repo Markets,” Annex II - Repo Margining Best Practices, page 60.

ASIFMA–ICMA Guide on Repo in Asia

until the failure has been remedied by the seller or the transaction has been terminated by the buyer. Transactions
which fail on their repurchase date should continue to be included in the calculation of net exposure until the failure
has been remedied by the buyer or the transaction has been terminated by the seller, as the transaction will continue
to have a transaction exposure. Where margin is paid or delivered for value on T+1 and T+2, the inclusion of repos
up until their repurchase date means that margin may be paid or delivered after the repurchase date. The alternative is
not to margin for collateral price movements over the last one or two business days of a transaction, which is a greaterrisk than overextended collateralisation. Any excess margin delivered as a result of this practice will be eliminated by
the next margin call. Paying or delivering margin for value on T+0 may not entirely eliminate this problem, as margin
may still be paid or delivered on the day that the underlying transaction exposure disappears and is unlikely to thenbe returned until the next business day. However, T+0 margin will significantly reduce the problem.
What transactions to include in the calculation of Net Exposure
Today is Thursday, 1 March 2012. You wish to calculate Net Exposure and, if necessary, make a margin call on
counterparty ABC. Consider the following outstanding repo transactions with ABC:
Transaction Date

Purchase Date

Repurchase DateType

Include?

1-Dec-12

1-Mar-12

3M

yes

2-Feb-122-Mar-12

1M

yes

9-Feb-12

1-Mar-12

1M

yes

16-Feb-12

23-Feb-12 (failed)

1W

yes

27-Feb-12

5-Mar-12

1W

yes

23-Mar-12

25-Jun-12

forwardno27-Feb-12

28-Feb-12

6-Mar-12

1W

yes

29-Feb-12

1-Mar-122-Mar-12ON

yes

1-Mar-122-Mar-12

5-Mar-12

TN

no1-Mar-12

5-Mar-125-Apr-12

1M

noThe reason for not including transactions between their transaction date and purchase date is that, if the seller does
fail to deliver collateral on the purchase date, provided the buyer has not paid the purchase price to the seller, thebuyer will only have an interest rate risk, sometimes called a “net replacement cost”, rather than the type of credit
risk to which a counterparty is exposed once an exchange of cash and collateral has actually taken place (the risk oflosing principal). Such a risk should be hedged with interest rate risk management instruments rather than collateral.
b. Forward repos:
Following the general rule set out in the previous sub-section, forward repos should not be included in the calculationof net exposure (until they reach their purchase dates and cease to be forward transactions). This is because, until
collateral and cash are exchanged on the forward purchase date, the only risk on the transaction that is posed by thepossible default of one of the parties is that the non-defaulting party will have to arrange a replacement transaction ata worse repo rate or buy-back price. In other words, until the purchase date, the risk on a forward repo is an interest
rate risk (similar to the counterparty risk on a derivative) rather than the type of credit risk to which a counterparty is
exposed from the purchase date (the risk of losing principal). Such interest rate risk can be hedged.
By the purchase date of a forward repo, a net exposure is likely to arise because the required market value of thecollateral (taking account of any initial margin or haircut) will almost certainly have diverged from the purchase price.
Rather than by margining, this credit risk can be mitigated by the procedure set out in 2(b) of Annex I of GMRA 2000
and 2(c) of Annex I of the GMRA 2011, which allows parties, just prior to the purchase date, to adjust the purchaseprice or the number of purchased securities in order to eliminate any material difference between the purchase priceand the required market value of the collateral.
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Section II - ASIFMA and ICMABest Practices across the Repo Trade Lifecycle

3.3.6.	 How often should net exposure be calculated and margin called?79
Net exposure should be calculated at least every business day. In exceptional circumstances, it can be calculated
intra-day.
Margin should be called whenever net exposure exceeds an acceptable threshold.
3.3.7.	 Interest payments on cash margin80
Interest is due on cash margin, except where such margin is paid because of a failure by the Buyer to return certain
collateral securities on the Repurchase Date (see 4(h)(i) of GMRA 2011).
Interest should be accrued on cash margin at a rate indexed to a reference rate agreed between the parties plus orminus an agreed spread. Common reference rates are overnight indexes such as EONIA for EUR, SONIA or RONIA
for GBP and Fed Funds Effective for USD.
Interest accruing on cash margin up to but excluding the day on which margin called today is due to be delivered (themargin delivery date) should be included in the calculation of Net Exposure.
Where parties have agreed to use a particular interest rate reference to calculate the reinvestment income on cash
margin, one party cannot unilaterally apply another reference rate if and when the agreed rate becomes negative.
Parties have to agree changes to such contract terms and any changes, like the original rate, should be recorded intheir master agreement or, if that is not practicable, in confirmations. When an agreed reference rate goes negative,
unless and until a new reference rate is agreed, parties are contractually obliged to pay negative rates.
3.3.8.	 Should initial margin or haircut be deducted from margin securities81
If an initial margin or haircut has been taken from a particular issue of securities used as collateral in a repo witha particular counterparty, it is logical to apply an initial margin or haircut to that same security if it is to be given as
margin. However, the initial margin or haircut to be imposed on margin securities could be different from that imposedon the same securities when they were first repoed because of changing circumstances in the interval between thepurchase date and the margin call. In the GMRA 2011, provision is made for a haircut (but not an initial margin) on
margin securities. Such a haircut is called margin percentage (see section 2(aa) of GMRA 2011).
3.3.9.	 Can margin securities be substituted?82
Securities given as margin by one party to a repo can be substituted with the agreement of the other party, whoshould act reasonably and in good faith in response to such a request.
Parties often require substitute securities to be delivered before the original securities are released. Substitutesecurities and securities being substituted should be delivered in line with the deadline for delivering margin above.
3.3.10.	 When is margin returned83
Cash margin and margin securities held by one party are not automatically returned to the other party unless thesecond party specifically requests the return of previous margin when making a margin call on the first party.

3.4.

Repricing – alternative to margining and income payments

3.4.1.	 How is “repricing” used to eliminate net exposures?84
Net exposures on sell/buy-backs and many repurchase agreements are not eliminated by means of margin. Instead,the transaction is terminated and simultaneously a new transaction is created for the remaining term in which either(1) the purchase price of the new transaction is set equal to the new market value of the securities or (2) the nominal
79
80
81
82
83
84

42

ICMA “ERC Guide to Best Practices in European Repo Markets,” Annex II - Repo Margining Best Practices, page 64.
ICMA “ERC Guide to Best Practices in European Repo Markets,” Annex II - Repo Margining Best Practices, page 66.
ICMA “ERC Guide to Best Practices in European Repo Markets,” Annex II - Repo Margining Best Practices, page 66.
ICMA “ERC Guide to Best Practices in European Repo Markets,” Annex II - Repo Margining Best Practices, page 66.
ICMA “ERC Guide to Best Practices in European Repo Markets,” Annex II - Repo Margining Best Practices, page 67.
ICMA “ERC Guide to Best Practices in European Repo Markets,” Annex II - Repo Margining Best Practices, page 67.

ASIFMA–ICMA Guide on Repo in Asia

value of the securities is changed to bring the market value at the new market price into line with the original purchaseprice (see 4(j) and 4(k) of the GMRA 2000 and 4(k) and 4(l) of the GMRA 2011). In method (1), the repurchase price ofthe terminated transaction (as of the termination date) and the purchase price of the new transaction should be set-off
and paid net. In method (2), the amount of the collateral securities of the terminated transaction and the amount of
the collateral securities of the new transaction should, if they are the same (see below), be set off and delivered net.
These methods are sometimes collectively called “repricing”. In the GMRA, however, the first method is called repricing
and the second method is called adjustment.
Under the repricing method, accrued repo interest is “cleaned up”, ie paid over to the buyer by not including in the
new purchase price.
Whereas margining is applied to transactions in aggregate, repricing and adjustment have to be applied to individualtransactions. It is usual to reprice or adjust transactions in sequence, starting with the transaction with the highest
transaction exposure, and continuing until net exposure is reduced to an acceptable level.
Under the GMRA, when a transaction is adjusted, the parties can agree to allow the substitution of the collateral.
The repricing method is more common than the adjustment method.
3.4.2.	 Coupon, dividend and other income payments on collateral
During the term of a repo, the collateral is the property of the buyer, which means that all income generated by thecollateral is paid by the issuer directly to the buyer. However, because the repurchase price is fixed or calculable, both
the risk and return on collateral in a repo should be retained by the seller. So, under the terms of a repo contract, thebuyer is obliged to make equivalent income payments to the seller (often called ‘manufactured payments’). On the other
hand, if the issuer does not make an income payment due on collateral, the buyer does not have to make the equivalent
payment to the seller. The guiding principle is that the seller should receive the equivalent of all income payments due on
collateral to the same extent that it would have received actual income had it not repoed out the collateral.
In a repurchase agreement, an equivalent income payment from the buyer is due on the same day as the corresponding
income payment by the issuer of the collateral. The equivalent income payment plus reinvestment income is deductedfrom the repurchase price. The buyer will suffer the loss of the equivalent income plus reinvestment income, as thiswill have been deducted from the repurchase price he is due to receive from the seller, even though he will not havereceived the coupon from the issuer. In effect, the deduction means the seller will receive the equivalent income
payment (plus reinvestment income), despite the intention that he should be the party exposed to the risk of any
default on the collateral. As there is no provision in the GMRA to do this, such a provision would have to be adopted
by parties by an agreed amendment to their GMRA or, if that is not practicable, by inclusion in their confirmations.85

3.5.	Confirmation and affirmation of post-trade amendments and updates to the terms ofa repoWhen the agreed terms of a repo are amended or updated after its purchase date, it is best practice to promptly
confirm or affirm the change. Confirmation will constitute prima facie evidence of the amendment or update in theevent of a dispute. Confirmation or affirmation is particularly important in structured transactions, such as term repos,
evergreen repos and floating-rate repos. Confirmation or affirmation is also particularly important for large (over USD
50 million or equivalent) or longer-term repos (with an initial term of one year or more), as the consequences of a
mistake or disagreement about terms would be greater.
It is best practice to cross-reference confirmations of post-trade updates to a repo to the confirmation of the originaltransaction in order to allow the terms which are being updated to be checked.

85

ICMA “ERC Guide to Best Practices in European Repo Markets,” section 3.4-3.6, p35-p36.

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Section II - ASIFMA and ICMABest Practices across the Repo Trade Lifecycle

Best practice recommendation: It is best practice to promptly confirm or affirm post-trade amendments or updates tothe agreed terms of a repo. Updates should be cross-referenced to the original confirmation.86

3.6.

Managing repo using tri-party services

Tri-party repos reduce counterparty and operational risk by having a centralized intermediary through which transactions
are settled. However, the tri-party arrangement does not affect the transfer of ownership of the collateral securities
between bilateral counterparties to a trade. Rather, “buyers receiving collateral in a tri-party repo benefit from thesame level of asset protection as if they were receiving the collateral bilaterally, as the tri-party agent is not a principal
in the transaction.”87 By serving as an independent custody and holding collateral securities and margin, the tri-party
agent ensures that collateral assets are truly available to the buyer and thus offers additional protection in the eventof counterparty default. In consequence, settlement and delivery fails are more easily resolved in a tri-party platform
compared to a bilateral platform.
3.6.1.	 Pre-trade best practices in tri-party repo
Bilateral agreements, such as a GMRA, must first be in place before the principal parties negotiate a tri-party service
agreement with the tri-party agent of their choice. The buyer must also set up dedicated securities accounts toseparate the collateral purchased through tri-party repos.88
Before entering into the transaction, each party must decide their collateral eligibility requirements, limits on how muchof each type of collateral it is willing to accept, and the initial margin/haircuts it will apply in each category.89 Collateral isusually categorized according to its credit rating, market, and type of security and country of issuance.90 Alternatively,
parties can agree to a basket of securities and the collateral provider has the right of substitution.91
3.6.2.	 Initiating tri-party repo
To initiate tri-party repos, bilateral repo documentation (such as a master repurchase agreement) is required between
the buyer and seller, and parties will enter into an additional agreement with the tri-party agent to agree on collateralmanagement services to be provided. Once a transaction has been agreed bilaterally, both parties independently“notify the tri-party agent of the specifications of the transactions (e.g. deal size, maturity and rate) and the collateralprofile (or basket) to be used.” The tri-party agent matches the instructions and, if successful, “initiates the movementof cash and collateral between the accounts of the counterparties, on the basis of delivery versus payment, andreports settlement results to both parties.”92 Figure 2 below illustrates a basic tri-party repo transaction whereby thetri-party agent serves as an intermediary between the buyer and seller for custody services, collateral management,
margin maintenance, payment and settlement.

86
87
88
89
90
91
92

44

ICMA “ERC Guide to Best Practices in European Repo Markets,” section 3.12-3.13, p38.
Euroclear, “Understanding Repos and the Repo Market,” 2009, page 33.
Euroclear, “Understanding Repos and the Repo Market,” 2009, page 34.
Euroclear, “Understanding Repos and the Repo Market,” 2009, page 34.
Euroclear, “Understanding Repos and the Repo Market,” 2009, page 34.
Barclays, “Repo Market – Masterclass,” May 2014.
Euroclear, “Understanding Repos and the Repo Market,” 2009, page 35.

ASIFMA–ICMA Guide on Repo in Asia

Figure 2: “Classic” Tri-Party

Collateral
Seller

Tri-Party
Agent(custodian)

Cash

Buyer
(cash provider)

3.6.3.	 Collateral management by the tri-party agent
Tri-party agents also provide collateral management services throughout the life cycle of the repo transactions. Tri-party
agents undertake the operational processes of managing and valuing collateral (including mark-to-market valuations
and meeting margin calls) on a more granular basis than would be operationally feasible on a bilateral basis, which
is designed to reduce the risk of unsecured exposures as a result of market movements. Tri-party agents enhancesettlement efficiency by integrating their collateral management systems with their settlement platforms, which allows
for automated substitution of collateral.
Since the scope of eligible collateral is agreed between two counterparties upfront, all collateral management processes
are performed directly by the agent.93 For instance, the agent continuously monitors the collateral throughout the life
cycle of the transaction to ensure that collateral remains within the pre-agreed eligibility criteria (such as if it suffers aratings downgrade, etc.) and sufficient to cover exposures (e.g. if it suffers a material decline in value).94 The agent
also triggers margin calls and transfers collateral between the accounts of the seller and buyer to cover collateralshortfalls, should the value of initial collateral fall below sufficient levels. Further, tri-party agents optimize collateralinventories, which “involves the continuous re-evaluation of the securities available to sellers for use as collateral (e.g.
through new purchases), and the automatic substitution of collateral, to release the best collateral back to the seller
by using the full range of eligibility specified by buyers.”95 Rights to re-use collateral are also allowed in a tri-party
framework whereby “tri-party clients are able to use collateral bought through one tri-party repo (or another type of triparty transaction) in another tri-party repo (or another type of tri-party transaction), with no impact on the relationshipbetween the original counterparties.” However, the securities provider must agree to the re-use of those securities.

3.7.

Default management procedures

3.7.1.	 Failure to deliver collateral versus event of default
The 2011 GMRA provides protections against counterparty default, as well as protocols to deal with delivery fails,
which contribute to risk management. Under the GMRA, there is an important distinction between a failure to deliver
securities and an event of default: a failure by either party to deliver collateral is not an automatic event of default.
Rather, the non-defaulting party is required to serve a default notice in order to trigger a default, provided that theparties elected to treat failure to delivery as an event of default when they negotiated their GMRA. If the non-defaulting
party chooses not to serve a default notice, the defaulting party should endeavour to deliver margin at the earliest
opportunity. Since the contractual provisions do not automatically trigger a default, it allows securities deficits to bepromptly handled between counterparties and enables them to reach a solution where possible.

93
94
95

Euroclear, “Understanding Repos and the Repo Market,” 2009, page 35.
Euroclear, “Understanding Repos and the Repo Market,” 2009, page 35.
Euroclear, “Understanding Repos and the Repo Market,” 2009, page 35.

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Section II - ASIFMA and ICMABest Practices across the Repo Trade Lifecycle

What happens if margin is not delivered?
Failure to deliver margin is an event of default. It is not however an automatic event of default, so the non-defaulting
party is required to serve a default notice in order to trigger a default. If the non-defaulting party chooses not to servea default notice, the defaulting party should endeavour to deliver margin at the earliest opportunity.
Delayed payments or deliveries of margin from one party should not be set off against margin calls made on the otherparty on subsequent days. To do so would encourage the unacceptable practice of trying to avoid a margin call by
rolling that obligation forward to see if movements in market prices eliminate transaction exposures.
However, if a party making a margin call requests the return of margin securities delivered to the other party in response
to a previous margin call, but the other party is unable to return those securities, despite its best endeavours becauseof circumstances beyond its control, the GMRA 2011 allows the undelivered margin securities to be substituted bymeans of payment of a cash equivalent amount (see 4(h) of GMRA 2011).96
a. In the event of a failure by a seller to deliver collateral to the buyer on the purchase date, the GMRA (paragraph10(g))
provides that:• If the parties so elected when they negotiated their GMRA (2000 or 2011), a failure to deliver collateral would be an
event of default but not an automatic one. It is up to the buyer to serve a notice in order to put the seller into default
and trigger the process of closing out and netting outstanding repos with the defaulter. Under the GMRA 2000,
the notice will be a default notice. Under the GMRA 2011, it will be a notice of an early termination date (no earlier
than the date on which the notice becomes effective and no later than 20 days afterwards). Putting a counterparty
into default is a very serious step, with potential market and systemic implications, and should only be taken by
senior management. They need to be sure that the failure to deliver reflects credit problems at the counterparty
and not temporary operational problems (at the seller or its custodian, or within the settlement infrastructure) or
market illiquidity beyond the control of the seller.
• If the buyer does not put the seller into default, the buyer should withhold the purchase price from the seller or, if
this has been paid, he should immediately require the seller to repay or, if necessary, call for cash margin from theseller (but if the buyer owes any sums to the seller, these will be set off against the purchase price).
• Unless the buyer puts the seller into default, the contract remains in force until the intended repurchase date,unless the buyer terminates the transaction, which he is entitled to do at any time.
• At any time while the transaction remains in force, the seller will be able to deliver the collateral to the buyer and isentitled to receive the purchase price in exchange.
• Whether or not the seller makes a late delivery of the collateral, on the repurchase date, the seller will be obliged
to pay the purchase price to the buyer and the buyer will be obliged to pay the repurchase price to the seller. The
difference is the repo interest for the full intended term of the transaction. In other words, the seller will be liable
for the full amount of repo interest, even if he delivered the collateral late and therefore only had limited use of thepurchase price, or even if he never delivered the collateral and therefore never had any use of the purchase price.
• If the buyer terminates the transaction before the repurchase date, the seller will be obliged to pay the purchaseprice to the buyer and the buyer will be obliged to pay the repurchase price on the date of termination to the seller.
The difference is the repo interest for the period until termination.
b. In the event of a failure by a buyer to deliver equivalent collateral back to the seller on the repurchase date, the
GMRA (paragraph 10(h)) provides that:• If the parties so elected when they negotiated their GMRA, a failure to deliver collateral would be an eventof default but not an automatic one. It is up to the seller to serve a notice in order to put the buyer into
default and trigger the process of closing out and netting outstanding repos with the defaulting party. Under
the GMRA 2000, the notice will be a default notice. Under the GMRA 2011, it will be a notice of an earlytermination date (no earlier than the date on which the notice becomes effective and no later than 20 days
96

46

ICMA “ERC Guide to Best Practices in European Repo Markets,” page 10.

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afterwards). As emphasised already, placing a counterparty into default is a very serious step, with potential
market and systemic implications, and should only be taken by senior management. They need to be surethat the failure to deliver reflects credit problems at the counterparty and not temporary operational problems(at the buyer or its custodian, or within the settlement infrastructure) or market illiquidity beyond the controlof the buyer.
• If the seller does not put the buyer into default, the seller should withhold the repurchase price from the buyer or,
if this has been paid, he should immediately require the buyer to repay or, if necessary, call for cash margin fromthe buyer (but if the seller owes any sums to the buyer, these will be set off against the repurchase price).
• Unless the seller puts the buyer into default, the contract remains in force until the buyer delivers or the sellerterminates the transaction, which he is entitled to do at any time.
• The seller can trigger a mini close-out. This is an informal term used to describe the termination of a failedtransaction by the seller under the terms of paragraph 10(h)(iii) of the GMRA 2000 or 10(i)(iii) of the GMRA 2011.
Under this procedure, the buyer will be obliged to pay to the seller the difference between (1) the default market
value of the collateral due under the failed transaction (all other repos continue in force), as determined by theseller and (2) the repurchase price due to the buyer.
c. The mini close-out is the equivalent process in the repo market to the buy-in process used to deal with failedtransactions in the cash market. However, while attempts have been made by the ICMA to harmonise the twoprocesses, there are still important differences between them. There can be delays of up to four business days
between a mini close-out and a buy-in, because the valuation of collateral under a mini close-out can takeplace at any time over the five business days following a mini close-out notice, whereas a buy-in occurs at a
fixed four business days following a buy-in notice. In addition, the methodology applied to the calculation of thepayment due to the seller in a mini close-out is different to that applied in a buy-in by a buyer in the cash market.
In particular, a mini closeout can use an estimate of fair market value, whereas a buy-in depends upon an agent
purchasing a security from a third party. Therefore, in an illiquid market, a mini close-out can be completed, but
a buy-in might not. This means that there is a basis risk where a party has purchased a security in the cash
market to deliver to another party on the repurchase date of a repo but the cash market seller fails to deliver.
If the party consequently fails to deliver on the repo and the other party to the repo (the buyer) triggers a miniclose-out and opts to value the collateral at its fair market value in order to calculate the amount owed by the
first party (the repo seller), the first party would be left with a long position in the cash market. Given the illiquidityof the cash market, the position will not be closed out easily if at all (although some of the market risk might behedged in the derivatives market).97
Best practice recommendation: It is best practice to accept partial deliveries in a ‘mini close-out’ under paragraph10(h) of the GMRA 2000 or 10(i) of the GMRA 2011.98
3.7.2.	 What happens if there is a dispute about a margin call99
The GMRA does not include a dispute resolution procedure. However, the parties have a general legal obligation toact in good faith and need to be aware of the potential regulatory consequences of disputed margin calls. In addition,members of the ASIFMA/ICMA are expected to be conscious of their reputation in the market and of the need topreserve the integrity of the market by resolving disputes as promptly and efficiently as possible, and to do so by
acting reasonably and in a professional manner. It will anyway be in their own interests if they wish to preserve thebusiness relationship with their counterparty.
The parties to a disputed margin call also need to be aware that failure to meet a margin call is a potential event ofdefault. On the other hand, the party making a margin call has a duty to act in good faith in making its calculation andshould be able to prove this.
Upon receiving a query about a margin call, a firm should act quickly to check their calculation and the accuracy of the

97
98
99

ICMA “ERC Guide to Best Practices in European Repo Markets,” Annex I, p47-p50.
ICMA “ERC Guide to Best Practices in European Repo Markets,” section 2.47, p24.
ICMA “ERC Guide to Best Practices in European Repo Markets,” Annex II - Repo Margining Best Practices, page 68.

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Section II - ASIFMA and ICMABest Practices across the Repo Trade Lifecycle

margin call notice that they have given to the counterparty. A firm disputing a margin call should detail the grounds on which
they dispute the call. It is therefore important that margin calls provide adequate information on the underlying calculation.
The party disputing the margin call should not delay transferring margin securities or paying cash margin up to theamount on which both parties agree.
3.7.3.	 Event of default protocol• Receipt of a default notice will trigger all transactions to be terminated (closed out) and their repurchase dates
accelerated for immediate settlement.
• The net present value of the obligations owed to the defaulting party are then netted (set off) against the netpresent value of obligations owed by the defaulting party to leave a residual net amount.
3.7.4.	 The issuance of termination notices to counterparties
Before serving termination notices, including mini close-out notices but not default notices, it is best practice, if timeallows, to give advance notice to a counterparty, including its repo desk, of your intention to serve a notice. Suchcourtesy is a matter of good relationship management but it may prompt the counterparty to take urgent action to
help remedy the underlying problem. Banks should therefore ensure that the department responsible for issuingsuch notices forewarns their repo desk of planned termination notices. This may require formal procedures to be put
in place, particularly where such operations have been delegated to geographically distant locations. However, thisdoes not mean that the repo desk should try to delay or prevent the issuance of a termination notice.
Best practice recommendation: It is best practice, if time allows, before serving termination notices, other thandefault notices, to give advance notice to a counterparty, including their repo desk, of the intention to serve a notice.
However, repo desks should not try to delay or prevent the issuance of such notices.
It is best practice to prepare for termination events, including events of default and failures to deliver collateral, by
drafting templates of termination notices in advance of possible future need. A model form of the notice that should
be served on a buyer to trigger a mini close-out, which has been prepared by the ICMA, is attached at Appendix V.
Best practice recommendation: It is best practice to prepare for termination events, including events of default andfailures to deliver collateral, by drafting templates of termination notices in advance of possible future need.100
3.7.5.	 Exercising a ‘mini close-out’ in response to a failure to deliver• In the event that a buyer has failed to deliver equivalent collateral on the repurchase date, a seller may trigger amini-close out.
• Seller must provide advisory note to the buyer ASAP on the same day as the fail or the morning of the next
business day• Seller ought to accept partial delivery of the equivalent securities from the buyer
Where the buyer in a repo fails to deliver equivalent collateral to the seller on the repurchase date, the seller has theright to exercise a mini close-out on that transaction (under paragraph 10(h) of the GMRA 2000 or 10(i) of the GMRA
2011)6. Where a seller decides to trigger a mini close-out (which is an exceptional step – see the next paragraph below
on “Great caution should be exercised”), in order to minimise the interval between the mini close-out and a buy-in on thelinked cash transaction, it is best practice, for the seller to serve, as soon as possible, a notice advising the buyer that heintends to serve a mini close-out notice. The advisory notice should be served on the same day as the fail or as soon as
the seller decides to trigger a mini close-out, if that is later, but otherwise as early as possible on the morning of the next
business day. The subsequent mini close-out notice should state that, if the buyer has not delivered equivalent securities
to the seller by noon of the same day, the seller will serve a mini close-out notice by close of business. An example ofan advisory and mini close-out notice is provided in Annex V (options A and B, respectively).101
100
101

48

ICMA “ERC Guide to Best Practices in European Repo Markets,” section 3.10-3.11, p37.
ICMA “ERC Guide to Best Practices in European Repo Markets,” section 3.1-3.3, p34-p35

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If a seller triggers a mini close-out, it is best practice for the seller to accept partial delivery of the equivalent security
from the buyer.
Great caution should be exercised before triggering a mini close-out in the repo market for Asian securities.
This is because the potential cost of a mini close-out in this market is considerably greater than the average
return being made on the trading of repos. The risk of facing expensive mini closeouts would be likely to deter
many banks from active participation in the repo market, which would seriously undermine market liquidity
and raise the cost of transacting. Consider the potential cost of a mini close-out. Assuming that collateral isvalued at the middle cash market price in the repo market, but at the offer price for a mini close-out, the costof a buy-in would be equal to half the bid/offer spread in the cash market. Half the typical cash market bid/offer spread of 10 basis points on a USD 100 million cash transaction in government bonds is worth USD
50,000, whereas the typical repo market bid/offer spread of 5 basis points per annum for a 30-day repo of
USD 100 million of collateral would be worth only USD 4,167. In addition, the mini close-out would have totake into account movements in the value of collateral between the repurchase date and the date of the miniclose-out calculation.
Best practice recommendation: It is best practice for the seller in a repo on which the buyer has failed to deliverequivalent collateral on the repurchase date, who wishes to trigger a mini close-out, to serve an advisory notice tothe buyer as soon as possible on the same day as the fail or as soon as he decides to trigger a mini close-out, if thatis later, but otherwise as early as possible on the morning of the next business day. The subsequent mini closeout
notice should state that, if the buyer has not delivered equivalent securities to the seller by noon of the same day, theseller will serve a mini close-out notice by close of business. It is best practice for the seller to accept partial deliveryof the equivalent securities from the buyer.102

3.8.

Accepting partial settlement and pairing-offs

Partial settlement and pairing-offs/net settlement are the market conventions and best practices in international markets.
3.8.1.	 Partial settlement
Partial settlement is a market practice where part of the trade is settled with movement of securities taking place at theinitial purchase of the repo trade or at the time of the repurchase when the transaction is not subject to a rollover thatis net-settled. Counterparties such as inter-dealers and established participants (such as the hedge fund community)
would normally accept partial settlement as it is more likely for them to get the full size earlier when accepting partial
delivery as compared to waiting for the full size to be delivered, especially for bonds that are difficult to borrow. It allows
the trade to happen by settling as much as possible.
It is also best practice for partial deliveries be accepted in mini close-outs under paragraph 10(h) of the GMRA
2000 or 10(i) of the GMRA 2011, given that there will be no prospect of further deliveries because of the terminationof the transaction.
The motivations of partial settlement include: (i) improves liquidity in ‘difficult to borrows’; (ii) reduces the number offails in the market; (iii) frees up the bonds and keeps two-way flows more liquid; (iv) an important practice for bondsthat are less liquid.
Best practice recommendation: It is best practice to accept partial settlement in order to allow the trade to happen, as
well as under the situation of a ‘mini close-out’ under paragraph 10(h) of the GMRA 2000 or 10(i) of the GMRA 2011.
3.8.2.	 Pairing-offs / net settlement
Pairing-off allows for settlement of net differences of cash amount and it is the international best practices to pair-off
particular cash flows at the time of a rollover.

102

ICMA “ERC Guide to Best Practices in European Repo Markets,” section 3.1-3.3, p34-p35.

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Section II - ASIFMA and ICMABest Practices across the Repo Trade Lifecycle

The motivations of pairing-offs include: (i) reduces risk (settlement, funding and credit); (ii) avoids market disruptionof having to recall onward pledged securities; and (iii) provides an additional opportunity to confirm trade details withsettlement (marginal benefit).
Best practice recommendation: It is best practice to accept paring offs to settle on a net basis of cash amount when
there are rollover trades at the end of the repo trade period.

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AnnexAnnexAnnex I: Current Market Dynamics in Select ASEAN + 3 Economies
Sale & purchase (Classic or buy and sellbacks), borrow & lend, and pledge103

OTC vs.
Exchange104

Foreignparticipation
permitted105

China

Pledged repo (turnover approximately 96.6%);
Classic repo (turnover approximately 3.4%)

OTC (mainly) andexchange

N

Hong KongClassic repo;
Borrow and lend also exists

OTC (mainly) andexchange

Y

Japan

Borrow & lend (mainly), also classic repo
(Gensaki market)

OTC

Y106

Korea

Classic repo

OTC (mainly) andexchangeNIndonesia

Buy/Sell-back (mainly) & Classic repo

OTC

Y

Malaysia

Classic & Buy/Sell-back

OTC107

Y108

Philippines

Classic repo109

OTC

Y

ThailandClassic repo (mainly);
OTC
Sell/buy back structure exists but is not widelyusedY

VietnamClassic repo

Y

103
104
105

106
107
108

109

52

Exchange

Ryuichi Shiina, Japan Securities Dealers Association’s working document, “Enhanced Comparative Analysis of Repo Markets in 9 ASEAN + 3 Countries & Jurisdictions,” 15 April 2014.
Ibid.
EMEAP, Repo Markets: State of Play, 2014, page 15,
http://www.emeap.org/wp-content/uploads/2015/04/Publications_EMEAP_Working_Group_on_FinancialMarkets_-_Report_on_EMEAP_Repo_Markets_.pdf.
Note: Foreign third party collateral managers must obtain regulatory approvals such as FIP, QFI, among others.
Note: Almost all repos are conducted between Bank Negara Malaysia and the Primary Dealers.
Non-resident institutions are eligible provided they have a resident counterparty. Foreign exchange regulations limit outstanding positions to RM10 million. Source: EMEAP, “Repo Markets:
State of Play,” 2014, page 15,
http://www.emeap.org/wp-content/uploads/2015/04/Publications_EMEAP_Working_Group_on_FinancialMarkets_-_Report_on_EMEAP_Repo_Markets_.pdf.
Note: Although the legal framework recognizes full title transfer, repos are taxed as loans (see Annex II).

ASIFMA–ICMA Guide on Repo in Asia

Annex II: Legal and Tax Arrangements in Select Asian Jurisdictions
Use of GMRA

Tax Treatment Basis

Witholding Tax

Australia

Y

Loan

Y

China

N

Loan and OutrightN

Hong Kong

Y

Loan

N

Indonesia

N

Loan

Y

Japan

Y

Loan

N

Korea

Y

Loan

Y

Malaysia

Y

Loan

N

New ZealandY

Outright

N

Philippines

N

Loan

Y

Singapore

Y

Loan

N

Thailand

Y

Loan

N

Source: E MEAP, Repo Markets: State of Play, 2014,
http://www.emeap.org/wp-content/uploads/2015/04/Publications_EMEAP_Working_Group_on_FinancialMarkets_-_Report_on_EMEAP_Repo_Markets_.pdf

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AnnexAnnex III: Forms of Confirmation in Annex II of the GMRA
Form of Confirmation in Annex II of the GMRA 2000
Form of Confirmation
To:
From:
Date:
Subject:		
		[Repurchase] [Buy/Sell Back]* Transaction(Reference Number: )Dear Sirs,
The purpose of this [letter]/[facsimile]//[telex], a “Confirmation” for the purposes of the Agreement, is to set forth the terms
and conditions of the above repurchase transaction entered into between us on the Contract Date referred to below.
This Confirmation supplements and forms part of, and is subject to, the Global Master Repurchase Agreement asentered into between us as of [ ] as the same may be amended from time to time (the “Agreement”). All provisions
contained in the Agreement govern this Confirmation except as expressly modified below. Words and phrases definedin the Agreement and used in this Confirmation shall have the same meaning herein as in the Agreement.
1.

Contract Date:

2.

Purchased Securities [state type[s] and nominal value[s]]:3.

CUSIP, ISIN or other identifying number[s]:4.

Buyer:

5.

Seller:6.

Purchase Date:

7.

Purchase Price:

8.

Contractual Currency:[9.

Repurchase Date]:*[10.

Terminable on demand]:*11.

Pricing Rate:[12.

Sell Back Price:]*13.

Buyer’s Bank Account[s] Details:

14.

Seller’s Bank Account[s] Details:[15. 	The Transaction is an Agency Transaction. [Name of Agent] is acting as agent for [name or identifier ofPrincipal]]:*[16.

Additional Terms]:*

Yours faithfully,* Delete as appropriate

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Form of Confirmation in Annex II of the GMRA 2011
Form of Confirmation
To:
From:
Date:
Subject:		
		[Repurchase] [Buy/Sell Back]* Transaction(Reference Number: )Dear Sirs,
The purpose of this [letter] [facsimile], a “Confirmation” for the purposes of the Agreement, is to set forth the terms
and conditions of the above repurchase transaction entered into between us on the Contract Date referred to below.
This Confirmation supplements and forms part of, and is subject to, the Global Master Repurchase Agreement asentered into between us as of [ ] as the same may be amended from time to time (the “Agreement”). All provisions
contained in the Agreement govern this Confirmation except as expressly modified below. Words and phrases definedin the Agreement and used in this Confirmation shall have the same meaning herein as in the Agreement.
1.		

Contract Date:

2.		

Purchased Securities [state type[s] and nominal value[s]]:3.		

CUSIP, ISIN or other identifying number[s]:4.		

Buyer:

5.		

Seller:

6.		

Purchase Date:

7.		

Purchase Price:

8.		

Contractual Currency:[9.		

Repurchase Date]:*[10.

Terminable on demand]:*11.		

Pricing Rate:[12.

Sell Back Price]:*13.		

Buyer’s Bank Account[s] Details:

14.		

Seller’s Bank Account[s] Details:[15.	The Transaction is an Agency Transaction. [Name of Agent] is acting as agent for [name or identifier ofPrincipal] ]:*[16.

Additional Terms]:*

Yours faithfully,* Delete as appropriate

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AnnexAnnex IV: Documentation Requirements for Client Onboarding Process
During the client onboarding process, documentation and information requirements will vary based on the businessto be conducted and information available publicly. In general, documentation required to fulfill customer onboarding
and due diligence processes includes:• Certificate of Incorporation, together with change of name certificates• Memorandum and Articles of Association• Specimen signatures of the authorised signatories• Process Agent Letter (if applicable)• Audited financials of past 3 years• Prospectus• Investment Management Agreement• Applicable tax forms (W8/W9, US FATCA)

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Annex V: Example of Mini Close-out NoticeForm of mini close out notice to be served under paragraph 10(f)/(h)
To:
From:
Date:
Dear Sirs
Subject: [PSA/ISMA Global Master Repurchase Agreement 1995][TBMA/ISMA Global Master Repurchase Agreement 2000]110 dated _____(the “Agreement”)[Repurchase] [Buy/Sell]1 Transaction (reference number: _____)(the “Transaction”)
Seller:Buyer:
Purchase Date:
Repurchase Date:
Purchased Securities (including ISIN):
Terms defined in the Agreement have the same meaning in this letter.
You have failed to deliver Equivalent Securities on the Repurchase Date for the Transaction.
[Option A111
We hereby notify you that if you do not deliver Equivalent Securities by _____ we will serve notice on you underparagraph 10[(f)][(h)]112 (iii) of the Agreement terminating the Transaction in accordance with that paragraph.][Option B113
In accordance with paragraph 10[(f)][(h)]3(iii) of the Agreement, we hereby declare that the Transaction beterminated immediately in accordance with paragraph 10(c) of the Agreement.
We will determine the amount of the Repurchase Price and the Default Market Value of the Equivalent Securities inaccordance with paragraph 10(c) as at the date on which this notice is given. For this purpose the Default Valuation
Time is [_____] ].
[For the avoidance of doubt, we are not treating the failure to deliver Equivalent Securities as an Event of Default underparagraph 10(a)(ii) of the Agreement and this notice does not constitute a Default Notice.
This notice does not constitute a waiver of our right to serve a Default Notice in respect the failure to deliver Equivalent
Securities.114]
We reserve all our right to exercise any other remedy under the Agreement including, without limitation, the right toserve a Default Notice in respect of any Event of Default that may occur under the Agreement.
Yours faithfully

110 Delete as appropriate
111 Option A: notice of intention to exercise rights under mini close-out
112 Delete as appropriate; sub-paragraph (f) for the GMRA 1995 and (h) for the GMRA 2000
113 Option B: notice terminating the transaction under mini close-out
114 Include only for GMRA 2000 where the parties have specified that paragraph 10(a)(ii) applies

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AnnexAnnex VI: Glossary of Repo Terminology115
Where terms are used in the Global Master Repurchase Agreement (GMRA), they are indicated by Capital Initials.
Reference should always be made to the GMRA for the exact definition of these terms. References to terms definedelsewhere in the glossary are in italics.
Accrued interest: Part of the Market Value of a fixed-income security. On any particular day during the life of asecurity, accrued interest is the amount corresponding to the share of the next coupon payment which is owed towhoever is recorded as being the owner of the security on that day, but which is not yet due for payment by the issuer(ie accrued but not due). Market Value is equal to the agreed clean price of the security times its normal value plus
the outstanding accrued interest (see the formula below).
market value = nominal valueclean pricecoupon x day count+100
100 x annual basis

The clean price of a security plus accrued interest expressed in price terms (as a percentage of the nominal value ofthe security) gives the dirty price (see the formula below).
dirty price = clean price +coupon x day countannual basis

Fixed-income securities being used as collateral in the repo market should be valued inclusive of accrued interest (thisis called ‘full accrual pricing’, as opposed to ‘flat pricing’).
Adjustment: In the GMRA, a method that can be used to eliminate a Net Exposure by terminating a repo andcreating a Replacement Transaction for the remaining term to maturity. The Replacement Transaction will have a newMarket Value of collateral. This is calculated by adjusting either (i) the Repurchase Price on the day of the Adjustmentor (2) the original Purchase Price of the repo by the Margin Ratio or Haircut, where one of these applies, and thenmarginally increasing or decreasing the result to coincide with the closest multiple of the minimum denomination of
the security issue being used as collateral.
new Market Value ≈ latest Repurchase Price x Margin Ratio (1)or new Market Value ≈latest Repurchase Price(2)
1 - Haircut

or new Market Value ≈ original Purchase Price x Margin Ratio (3)or new Market Value ≈original Purchase Price
1 - Haircut(4)

The new Market Value is the value of the collateral that the Seller is obliged to deliver to the Buyer under the Replacement
Transaction. The Purchase Price of the Replacement Transaction can be set equal to either (1) the Repurchase Priceon the day of the Adjustment or (2) the original Purchase Price (in other words, the cash value of the repo is largely, if
not entirely, unchanged). If the new Purchase Price is set equal to the latest Repurchase Price, as the cash flows of
the terminated transaction and the Replacement Transaction are netted, the Buyer will not receive an early payment of
the repo interest accrued up to the day of Adjustment. If, on the other hand, the new Purchase Price is set equal is theoriginal Purchase Price, the Buyer will receive the accrued repo interest. As the collateral transfers of the terminatedtransaction and the Replacement Transaction are netted where possible, only the differences between the originaland new Market Values of collateral will actually have to be transferred. By netting, Adjustment achieves a margintransfer of collateral. Adjustment is an alternative to Margin Maintenance. It is designed for sell/buybacks but can beapplied to repurchase agreements. The related method of Repricing involves changing the Purchase Price rather than
115 ICMA “ERC Guide to Best Practices in European Repo Markets,” Annex III – glossary of repo terminology, page 71.

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the Market Value of the collateral. ‘Repricing’ is commonly used as a generic term that includes Adjustment. Under the
Adjustment method, it is possible for the parties to agree a complete or partial substitution of collateral. See GMRA
2000 paragraph 4(k) and GMRA 2011 paragraph 4(l).
Affirmation: A process in which (1) one party contacts the other by telephone or e-mail in order to secure immediate
verification from the other party of the key economic terms of a transaction and settlement instructions or (2) bothparties report to a third-party automatic affirmation service, which makes comparisons and identifies mismatches. The
function of an affirmation overlaps that of a Confirmation but is less comprehensive.
Agency repo: A repo executed with a counterparty on behalf of a customer or customers by an agent. For example,
a fund manager may transact a repo with a dealer on behalf of several pension funds (the repo should be allocatedamong the customers after execution). The risk on the transaction is shared by the customer(s) and the agent’s
counterparty, but not by the agent. The transaction will be documented under a master agreement, such as the
GMRA, between the agent and the counterparty. In the case of the GMRA, the standard agreement has to besupplemented by the Agency Annex. There will be separate contracts between the agent and his customer(s). The
counterparty will need to know the identity of the customer(s) in order to be able to calculate is credit exposure andfulfil regulatory requirements. However, the identity of the customer(s) may not be provided to the front office of thecounterparty (for commercial reasons) but to the credit or another department of the counterparty. It is vital, whennegotiating a repo, to inform the counterparty whether one is transacting as a principal or an agent.
Annual basis: The number of days that are conventionally assumed to be in one year, for the purpose of calculating
the amount of return from an annualised percentage rate of return. The annual basis is conventionally denoted by theletter B and is the denominator of the day count fraction (D/B), where the numerator is the day count of the term of
the transaction. There are often different conventions for the annual basis in the money market and capital market ofthe same currency.
ASIFMA: ASIFMA is an independent, regional trade association with over 70 member firms comprising a diverse
range of leading financial institutions from both the buy and sell side, including banks, asset managers, law firms
and market infrastructure service providers. Together, we harness the shared interests of the financial industry to
promote the development of liquid, deep and broad capital markets in Asia. ASIFMA advocates stable, innovativeand competitive Asian capital markets that are necessary to support the region’s economic growth. We drive
consensus, advocate solutions and effect change around key issues through the collective strength and clarity
of one industry voice. Our many initiatives include consultations with regulators and exchanges, development of
uniform industry standards, advocacy for enhanced markets through policy papers, and lowering the cost of doing
business in the region.   Through the GFMA alliance with SIFMA in the United States and AFME in Europe, ASIFMA
also provides insights on global best practices and standards to benefit the region. For more information, please visit
www.asifma.org.
Business Day: A day on which a transaction can be settled by means of transferring securities and/or making
payments of cash. Actions required to fulfil the contractual obligations of a transaction, such as the service of notices,
can only be performed on a Business Day. The ability to transfer of securities and/or make payments of cash requiresthat the relevant securities settlement systems (SSS) and/or cash payment systems be open for business. Weekends
are therefore not Business Days. Public holidays are also usually not Business Days.
Given that securities may have to be delivered between two SSS or between two custodian banks, and the possibilityof cross-currency repos, the Purchase Date and Repurchase Date of a repo may have to be a Business Day in morethan one city. Under GMRA 2000 paragraph 2(e) and 2011 paragraph 2(f), a Business Day is defined as:• for repos to be settled at a SSS, any day on which that system is open for business;• for repos to be settled by delivery of securities at a custodian bank, any day on which that bank is open forbusiness, as well as a day on which banks generally are open for business in the city which hosts the central
bank payments system for the currency of payment or, in the case of the euro, any day on which the TARGET
system is open.
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AnnexThe GMRA does not define what is meant by the close of business. This can be important, as attempts to maketransfers or payments, or to serve notices, after the close of business, mean that they will not be initiated or become
effective until the next Business Day. It is best practice for parties to agree a time for close of business in the countries
in which they operate and record it in Annex I of their GMRA or in Confirmations.
Buyer: In the GMRA, this is the party to a repo who buys collateral at the Purchase Price on the Purchase Date andcommits to sell back equivalent collateral on the Repurchase Date – which will be a fixed maturity or, in the case ofopen repo, on demand – at an agreed or calculable Repurchase Price. The Buyer is effectively a lender of cash andis said to be doing a reverse repo. Cf Seller.
Buy-in: A procedure that can be initiated by the buyer of a security in a cash trade following a failure to deliver that
security on time and/or in full by the seller. Under the ICMA Rules and Recommendations (Section 450), a party
affected by a fail can remedy the problem by arranging to ‘buy in’ the security from a third party. He has to give thefailing party five Business Days’ notice of his intention to do so (a pre-advice notice on the day of the fail and a buyin notice two Business Days later). If the failing party does not remedy the fail within five Business Days of the fail,despite notification by the buyer, the affected party appoints an agent to buy in the security in the ‘best available
market for guaranteed delivery’. Any excess in the cost of the buy-in over the price agreed originally with the failingparty is charged to the latter. In a repo under the GMRA, the equivalent process to a buy-in is a mini close-out but
there are differences.
Buy/sell-back: Another term for a sell/buy-back. Strictly-speaking, this is a sell/buy-back from the point of view of
the Buyer. Sometimes abbreviated to ‘buy/sell’.
Cash Equivalent Amount: In the GMRA 2011, this is a cash payment that can be called by a party making a margin
call, who has requested the return of Margin Securities, as part of the required margin, that were delivered to the otherparty under a margin call that the other party had previously made on the first party, in the event that the other party
is unable to return those securities, despite its best endeavours, because of circumstances beyond its control. The
Cash Equivalent Amount is intended to temporarily eliminate any consequent increase in Net Exposure. See GMRA
2011 paragraph 4(h).
Cash trade: An outright sale or an outright purchase of a security (with no obligation, as in a repo, to buy or sell backthat security).
CCP: The acronym for a central counterparty or central clearing counterparty. A CCP is a specialist intermediary,part of the infrastructure of the OTC market, which interposes itself into every transaction registered with it by its
members, to become the seller to every buyer and the buyer to every seller. The CCP then nets opposite transactions
with the same counterparty to produce a single margin call. Netting reduces the credit risk and operational cost oftransactions. The CCP is protected by taking initial margins upon the registration of transactions, transferring variation
margins between members to eliminate exposures on a daily basis, maintaining its own capital, requiring members tocontribute to a default fund and, in the event of a default by one or more members, having the right to share remaining
losses among surviving members.
Classic repo: Another name for a repurchase agreement.
Clean price: The price of a fixed-income security as generally quoted in the secondary cash market for that security.
It measures the capital value of the security in the secondary market but excludes the accrued interest on the security.
Clearing: A term which means the netting by a third party of opposite mutual obligations between two other parties.
Netting can be for operational convenience or to reduce risk. Clearing for operational convenience is performed bycustodian banks, CSD and ICSD, acting as agents, in order to reduce the volumes of transfers of securities andpayments of cash needed to settle transactions. Clearing to reduce risk is performed by CCP, acting as principals
by means of ‘novation’ or by ‘open offer’. Netting by novation as performed by a CCP means the creation of two
new contracts from an original. The original contract is that between the parties to a transaction. When this contract
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is registered with the CCP, the original contract is replaced by two new contracts: a new contract between the seller
and the CCP; and a new contract between the CCP and the buyer. In this way, the CCP becomes the buyer to every
seller and the seller to every buyer. Under open offer, when the buyer and seller transact, contracts are automaticallyand immediately created between each party and the CCP. At no stage is there a contract directly the buyer and seller.
Close-out and set-off: A contractual form of netting based on the legal technique of set-off (and sometimes called‘contractual netting’). Under the GMRA, the non-defaulting party terminates all transactions outstanding with thedefaulter that have been documented under the same agreement (this is ‘close-out’) and all obligations under thosetransactions are accelerated for immediate settlement. Acceleration requires the calculation of the present values ofobligations owed to and by the defaulter, and conversion into the same currency. Then, the net present value of theobligations owed to the defaulting party are netted against the net present value of obligations owed by the defaulting
party, to leave a residual net amount (this is ‘set-off’). This residual amount may be a small net exposure to thedefaulter (which has to be pursued by the non-defaulting party as an unsecured claim on the defaulter) or a surplus(which has to be returned to the defaulter). See GMRA paragraph 10.
Collateral: Legally-speaking, collateral is an asset or assets owned by a borrower to which a security interest has
been attached in order to provide security to a lender. As a result, the secured lender is given a property interest in theasset(s) by the borrower, which entitles the lender to seize and liquidate the collateral in the event that the borrower
defaults. The borrower retains a property interest in the asset(s), which means that, absent a default by the borrower,
the asset(s) cannot be sold by the secured lender, unless the borrower has given him a right of re-hypothecation.
Upon the discharge of the debt by the borrower, the secured lender must return a legally identical asset or assets. A
pledge is a type of security interest in which the asset acting as collateral must be transferred from the pledgor into
the possession of the pledgee.
The term ‘collateral’ is used colloquially in the repo market to describe the asset or assets sold in a repo. This is
not legally correct, as a repo transfers full legal title to the asset(s) from the Seller to the Buyer for the term of thetransaction. The Seller retains no property interest in the asset and the Buyer has the unfettered right to sell the asset
to a third party (ie without permission from the Seller).
Collateral Assets (CA): A type of collateral in a categorisation by the BIS Committee on the Global Financial System(CGFS). CA is the broadest of three categories and encompasses all assets that qualify for use in collateralised
funding transactions, such as in covered bonds, agency and private-label mortgage-backed and asset-backed
securities. The other CGFS categories are High Quality Assets (HQA) and High Quality Liquid Assets (HQLA).
Collateral downgrade trade: A combination of (1) a short-term repo of one asset or basket of assets from one party
to another and (2) a reverse repo of another asset or basket of assets of lower liquidity and sometimes lower credit
quality by the first party from the second for the same term. The net result is an exchange by the first party of higher
quality collateral for lower quality collateral (a downgrade). The difference in quality will be reflected in an enhanced
spread between the reverse repo rate being received by the first party and the lower repo rate being paid by the firstparty. A collateral downgrade trade is an example of collateral transformation. A collateral downgrade trade for one
party is a collateral upgrade trade for the other.
Collateral upgrade trade: A combination of (1) a short-term reverse repo of one asset or basket of assets fromone party to another and (2) a repo of another asset or basket of assets of lower liquidity and sometimes lower credit
quality by the first party to the second for the same term. The net result is an exchange by the first party of lower
quality collateral for higher quality collateral (an upgrade). The difference in quality will be reflected in an enhanced
spread between the repo rate being paid by the first party and the lower reverse repo rate being received by the firstparty. A collateral upgrade trade is an example of collateral transformation. A collateral upgrade trade for one party isa collateral downgrade trade for the other.
Collateral swap: Also known as a liquidity swap. An exchange of an asset or basket of assets for another asset or
basket of assets of lower liquidity and sometimes lower credit quality, either (1) directly, through a securities lendingtransaction, or (2) via a combination of a repo of the lower quality asset or assets and a matching reverse repo of

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Annexthe higher quality asset or assets between the same parties. A collateral upgrade trade is an example of collateraltransformation. It differs from collateral downgrade or upgrade trades in that it is for longer than one year.
Collateral transformation: Exchanging assets of different liquidity and sometimes lower credit quality, usually throughcollateral/liquidity swaps or collateral downgrade/upgrade trades, which can be securities lending transactions or
combinations of repos and matching reverse repos between the same parties.
Confirmation: A Confirmation is a written record (paper or electronic) recording: the unique economic terms of atransaction (price, term, amount, etc); any ad hoc terms (not already included in or different from those in the masteragreement between the parties); and settlement instructions (the accounts to which payments and deliveries should
be made). A Confirmation should be sent as soon as possible after a transaction has been agreed. It should besent by one party to another or by each party to the other. Parties receiving Confirmations should urgently crosscheck in order to identify mistakes in recording the terms or disagreements about what has been agreed. Mistakes
or disagreements should be promptly notified by the recipient to the other party and action initiated to resolve theproblem. A Confirmation plays a key role in the legal construction of the transaction. Whereas the GMRA and Annex
I set out the general terms and conditions of the business relationship between the parties, a Confirmation describes
the terms and conditions special to the transaction. A Confirmation would be regarded as prima facie evidence ofthe terms of a transaction, in the event of a disagreement, and ad hoc terms set out in a Confirmation would takeprecedence for the transaction being confirmed over any conflicting standard terms set out in the master agreement.
The function of a Confirmation overlaps that of an affirmation but is more comprehensive. The essential terms whichshould be included in a repo Confirmation are set out in GMRA paragraph 3(b) and in Annex II of the GMRA. For
transactions executed over an automatic repo trading system, traditional Confirmations tend to be substituted by the
notifications generated by the trading system.
Corporate value date: In a repo, the Purchase Date on which cash and collateral are usually exchanged is a money
market value date rather than a capital market settlement date. However, where one party (typically a customer)
cannot manage this earlier settlement, the value date of the repo may be deferred until the conventional capital market
settlement date, which is then referred to as a ‘corporate value date’.
Cost of carry: The difference between the amounts of accrued interest and repo interest earned over the term of arepo. A positive (negative) cost of carry means that a long position in a security will earn more (less) accrued interest
than it costs to finance that position by repoing out that security.
cost of carry = nominal value

coupon x day count
100 x annual basis- Purchase Pricerepo rate x day count
100 x annual basis

Credit repo: A repo against collateral other than government securities. This category usually includes high-quality
collateral such as supranational, sovereign and agency securities (SSA).
Cross-currency repo: A repo of a Purchase Price in one currency against collateral denominated in another currency.
CSD: The acronym for a central securities depository. A CSD is a specialized domestic institution, part of the market
infrastructure, which records (1) holdings of domestic securities, by providing accounts for the holders or their agents, and(2) changes in holdings, by means of entries between these accounts (book-entry transfer), rather than by the physicaltransfer of certificates. Securities may be issued to the CSD or another entity. To allow book-entry transfer, securities areeither dematerialised or immobilised. Most CSD are linked to independent cash payment systems. Cf ICSD.
Day count: The number of days that are conventionally assumed to be in the term of a transaction, from andincluding the value date up to but excluding maturity, for the purpose of calculating the amount of return from anannualised percentage rate of return. The day count is conventionally denoted by the letter D and is the numerator ofthe day count fraction (D/B), where the denominator is the annual basis. There are often different conventions for the
day count in the money market and capital market of the same currency.

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Day count fraction: The ratio of the day count (D) to the annual basis (B). The day count fraction is used to calculate
the amount of return from an annualised percentage rate of return. It is the assumed fraction of the year over whicha transaction runs.
repo interest = Purchase Pricerepo rate x day count
100 x annual basis

Default: A failure by one party to a transaction to perform one of the obligations to which it is contractually committed and forwhich the parties have agreed that failure would constitute an Event of Default. Events of default include acts of insolvency.
Delivery repo: Also known as deliver-out repo. A repo in which the collateral moves from the possession of theSeller or its agent to the possession of the Buyer or its agent for the term of the transaction. Delivery is required insome jurisdictions to prove that title to the collateral has been transferred and only delivery repo are covered by the
EU Financial Collateral Directive. Cf hold-in-custody repo and tri-party repo.
Dirty price: The price of a fixed-income security including accrued interest, from which the Market Value of the
security can be directly calculated. Cf clean price.
dirty price = clean price +coupon x day countannual basis

DVP: The acronym for delivery-versus-payment, which means settlement of the sale or other transfer of a security bymeans of the simultaneous exchange of that security for cash. Cf FOP.
End/end rule: The convention that normally applies in the foreign exchange and money markets (unless specified
otherwise) for periods that are multiples of one month and for which the value date is the last Business Day of acalendar month. The end/end rule specifies that the maturity is the last Business Day of the calendar month at theend of the period. For example, a 3-month deposit for value on 28 February (in a non-leap year) matures not on 28
May but on 31 May (or, if that is not a Business Day, then the nearest preceding Business Day in May). See also the
Modified Following Business Day Convention.
Equivalent: On the Repurchase Date or termination date of a repo, the Buyer is obliged to return equivalent collateral
to the Seller. Equivalent collateral is economically but not legally identical to that sold to the Buyer on the Purchase
Date, ie from the same security issue but not the original holding. This flexibility is needed because, during the termof the repo, the Buyer has the right to sell the collateral to a third-party, in which case, it would then have to buy backthe collateral from the market in order to settle with the Seller on the Repurchase Date. The collateral obtained andreturned by the Buyer is very unlikely to be the same holding as that received on the Purchase Date but it will be fromsame security issue, in other words, economically but not legally identical. The use of the term ‘equivalent’ also allows
the legal definition of collateral in a repo to accommodate collateral in the form of equity, which can be transformed
during the term of a repo by corporate events such as take-overs, rights issues, etc. The terms ‘fungible’ and ‘sameor similar’ are sometimes used instead of ‘equivalent’.
ERC: The acronym for the European Repo Council (ERC), which is a regional sub-council of the International Repo
Council, established by ICMA to represent member firms active in the repo market in Europe. Among other things, the
ERC provides guidance on the maintenance of the GMRA, publishes this Guide and organises a semi-annual surveyof the European repo market. Membership of the ERC is open to all ICMA members who, among other things, have a
dedicated repo activity. Details of the European repo market survey and the other activities of the ERC can be foundon the ICMA website, www.icmagroup.org.
Event of Default: An event, action or omission which parties to a master agreement accept will constitute a breachof the contract between them. The most important Event of Default is an act of insolvency. Under the GMRA, uponan Event of Default occurring, the affected party is provided with remedies, possibly subject to notification of thedefaulting party. The GMRA lists a set of standard Events of Default. See GMRA 10.
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AnnexEvergreen repo: A fixed-term repo in which the parties have the right to terminate the transaction before maturity, oran open repo with the standard right to terminate, but subject to giving several days’ or weeks’ notice of termination.
Failure to deliver: The failure by one party to a cash trade or repo to deliver the full amount of securities or othercollateral to the other party on the agreed Business Day. Failure to deliver therefore includes partial delivery and latedelivery. In a repo, failure to deliver can occur on the Purchase Date (the Seller fails) or on the Repurchase Date (theBuyer fails). Under the GMRA, the parties can agree to treat failure to deliver as an Event of Default. If failure to deliver
is not chosen or, where it is, if default is not actually triggered by the affected party, remedies include early terminationor, in the case of a failure on the Repayment Date, the calling of a mini close-out by the affected party. Otherwise, arepo contract remains in place. Failure to deliver on a cash trade may result in a buy-in.
Floating-rate repo: A repurchase agreement in which the repo rate is periodically re-fixed by reference to an interest
rate index such as LIBOR (in the case of LIBOR or other overnight or tom/next index, the repo rate would be re-fixed
daily). The repo rate may incorporate a spread under or over the index (eg LIBOR minus 3 basis points). Open repo
and term repo are also floating-rate repos.
FOP: The acronym of free-of-payment, which means settlement of a sale or other transfer of a security without asimultaneous exchange of cash. Margin transfers are made FOP. Cf DVP.
Forward price: The traditional method of quoting sell/buy-backs, although many are now quoted in terms of theirrepo rate. The forward rate is the forward break-even price of the collateral on the Repurchase Date of the repo andis equal to the Repurchase Price of the collateral minus its cost of carry, quoted as a percentage of the nominal valueof the collateral. The forward price shows the level above which the clean price of a security needs to be trading on
the Repurchase Date of a repo for the Seller to make a profit by selling off the collateral when he gets it back at theend of the repo. There are two formulae for the calculation of the forward price.
Formula (1)
CxD
R- Nx
100 x B
forward price = 			
N

x 100

where
R

Repurchase PriceNnominal value of the collateralC

coupon on the collateralDnumber of days according to the applicable convention from and including the last coupon payment dateto but excluding the Repurchase DateB

annual basis for the collateral

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Formula (2)
Nx

M
100

-

Nx

forward price =CxD
100 x BC

- Px

RxD
100 x Br

N

x 100

where
M

clean price of the collateral as quoted in the appropriate cash market

Nnominal value of the collateralC

coupon on the collateralD

day count according to the applicable convention from and including the Purchase Date to but excluding
the Repurchase dateBcannual basis for the collateral

P

Purchase Price of the sell/buy-back (see the Guide 2.7)

R

repo rate on equivalent repurchase agreementsBrannual basis for the repo

Forward repo: A repo with a Purchase Price on a forward date (ie after the nearest conventionally-earliest money
market value date) and a Repurchase Price on a later forward date.
General collateral (GC): Where the Seller in a repo has some choice about precisely what collateral to deliver tothe Buyer. For example, the Buyer may be willing to accept any of a number of certain government bond issues as
collateral. GC repos are therefore driven by the need to borrow and/or lend cash, rather than the precise identity of
the collateral, which means there will be a common GC repo rate for each currency and term to maturity.
GC repos constitute money market transactions and the GC repo rate should therefore be highly correlated with othermoney market rates. The spread between the GC repo rate and unsecured money market rates will reflect the credit
and liquidity risk premia on unsecured lending.
GMRA: The acronym for the Global Master Repurchase Agreement, which is the master agreement for repurchaseagreements published by the ICMA. It can be extended to include sell/buy-backs by attaching the Buy/Sell-Back
Annex. The latest edition of the GMRA was published in 2011, and superseded the 2000 edition, which itself
superseded the 1995 edition. See www.icmagroup.org.
GMSLA: The acronym for the Global Master Securities Lending Agreement, which is the master agreement for
securities lending transactions published by ISLA. The latest edition of the GMSLA was published in 2010, andsuperseded the 2000 edition, which itself superseded master agreements such as OSLA. See www.isla.co.uk.
Haircut: In the GMRA, an agreed percentage discount applied to the Market Value of collateral to fix the Purchase
Price on the Purchase Date of a repo. A Haircut is expressed as the percentage difference between Market Valueand Purchase Price. In the GMRA 2011, a Haircut applied to the Market Value of securities being delivered as margin
is called a Margin Percentage.
Haircut =Market Value of collateral - Purchase Price				
Market Value of collateral

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AnnexHigh-Quality Assets (HQA): A type of collateral in a categorisation by the BIS Committee on the Global Financial
System (CGFS). HQA is the second of three categories and comprises assets that market participants can use
to meet collateral demand from derivatives transactions. The other categories are Collateral Assets (CA) and High
Quality Liquid Assets (HQLA).
High-Quality Liquid Assets (HQLA): A type of collateral in a categorisation by the BIS Committee on the Global
Financial System (CGFS). HQLA is the narrowest of three categories and follows the Basel Committee on Banking
Supervision in including assets eligible for the Level 1 and Level 2 definitions of assets suitable for the Basel Liquidity
Coverage Ratio (LCR). Assets that qualify for the LCR are expected to have low credit and market risk and be easy
to value, exchange-listed, traded in active markets, unencumbered, liquid during times of stress and ideally central
bank-eligible. The other categories are High Quality Assets (HQA) and High Quality Liquid Assets (HQLA).
Hold-in-custody (HIC): A repo in which the Seller retains possession of the collateral, even though legal title passes
to the Buyer. HIC repos have been used where there are practical difficulties or high costs in moving collateral.
However, HIC repo exposes Buyers to the risk of ‘double-dipping’ by the Seller, ie the Seller selling the same pieceof collateral in more than one repo. In some jurisdictions, the transfer of title to collateral in a HIC repo may becontestable if there is no delivery and HIC repo are not covered by the EU Financial Collateral Directive. Cf delivery
repo and tri-party repo.
ICMA: The acronym for the International Capital Market Association, which represents financial institutions active in
the international capital markets worldwide and has members in over 50 countries. ICMA’s market standards andconventions have been pillars of the international debt market for over 50 years, providing the framework of rules
governing market practice which facilitate the orderly functioning of the market.
ICSD: The acronym for an International Central Securities Depository. An ICSD is a specialised international bank,part of the market infrastructure, to which international securities (traditional eurobonds) are issued, which provides
accounts for holders of these and many domestic securities, and which records changes in holdings by means of
entries between these accounts. As they are banks, ICSD provide cash accounts to members and can therefore offer
DVP settlement of securities transactions. They also provide tri-party services. Cf CSD.
Income: In the GMRA, coupons, dividends and other non-capital payments made by the issuer of a security.
Initial margin: An agreed premium applied to the Purchase Price of a repo to determine the required Market Valueof the collateral to be delivered on the Purchase Date. It is also applied each day during the term of a repo to the
Repurchase Price on that day to calculate the Market Value of collateral required in order to meet the contractual
obligation of the parties. If the difference between the Repurchase Price and the current Market Value of collateralis less (more) than the initial margin, the Buyer (Seller) has the right to call a margin from the Seller (Buyer). An initial
margin can be expressed either as (1) the Market Value as a percentage of the Purchase Price or (2) a ratio of the two
amounts. In the GMRA, an initial margin is called a Margin Ratio. A percentage initial margin of 100% means there isno margin.
initial margin (percentage) =initial margin (ratio) =Market Value of collateral		
Purchase Price

100

Market Value of collateral
Purchase Price

ISLA: The acronym for the International Securities Lending Association, a trade association established in 1989
to represent the common interests of participants in the European securities lending market. ISLA has around 90
members (comprising banks, pension funds, investment managers and insurance companies) and publishes the
Global Master Securities Lending Agreement (GMSLA). See www.isla.co.uk.

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Liquidity swap: Another term for a collateral swap. Manufactured payment: A term common in the UK for acontractual compensatory payment in a repo, made by the Buyer to the Seller, which is triggered by the payment ofa coupon, dividend or other Income on collateral by the issuer to the Buyer (the issuer pays the Buyer because theBuyer has the legal title to the collateral during the term of the repo). In a repurchase agreement, the manufactured
payment should be made on the same day as and be equal in value to the Income payment. In a sell/buy-back, themanufactured payment is deferred until the Repurchase Date and should be equal in value to the Income payment plus
re-investment income to compensate for the delay. In a sell/buy-back, the manufactured payment plus reinvestment
income is deducted from the Repurchase Price.
Margin: The term usually applied to a cash payment or transfer of collateral made by one party, in response to amargin call by the other, to eliminate an unintended credit exposure in a transaction between them. Under the GMRA,
either party is entitled to call margin to eliminate any Net Exposure. Known in other markets as ‘variation margin’.
Margin Maintenance: Under the GMRA, the process of calling on a repo counterparty to deliver margin, either bymaking a cash payment or by delivering additional collateral, in order to eliminate a Net Exposure in the portfolio of
repos and reverse repos between two parties that have been documented under the same agreement. The calculationof margin calls requires the marking-to-market of the collateral. There is choice of alternative procedures, designed forsell/buy-backs, called Adjustment and Re-Pricing, which achieve the same result. See GMRA paragraph 4.
Margin Percentage: In the GMRA 2011, the term for a Haircut applied to the Market Value of collateral being
delivered as margin. See GMRA 2011 paragraph 2(aa).
Margin Ratio: In the GMRA, the term for an initial margin. See GMRA 2000 paragraph 2(z) and GMRA 2011
paragraph 2(bb).
Margin threshold: The Net Exposure below which the parties to a repo may agree not to call a margin from eachother. Once the Net Exposure equals or exceeds this threshold, a margin is called which is sufficient to eliminate theentire Net Exposure. For this reason, the threshold is often called a minimum transfer amount.
Market Value: In the GMRA, the value of the collateral for the purposes of Margin Maintenance, calculated using“a generally recognised source agreed to by the parties”. See GMRA 2000 paragraph 2(cc) and GMRA 2011
paragraph 2(ee).
Master agreement: A written legal contract between two parties that sets out the terms and conditions governing
all transactions between them (unless specifically excluded) in the same financial instrument (eg repo) or class of
instrument (eg derivatives), as well as their rights and obligations, including remedies available in an Event of Default.
The GMRA is the standard master agreement for cross-border repos. It consists of: (1) the main agreement, whichsets out terms and conditions generic to the market and is a framework that should not need to be negotiatedor amended; (2) Annex I, which sets out terms and conditions generic to the business relationship between theparties and needs to have various elections recorded and any supplemental terms and conditions added, effectively
customising the main agreement, so will need negotiating; (3) other annexes that adapt the main agreement to sell/
buy-backs, agency repos and some specific markets and jurisdictions; and (4) Confirmations, which set out theterms and conditions specific to individual transactions. Each year, the ICMA commissions legal opinions on theenforceability in over 60 jurisdictions of the GMRA overall or of key parts such as the close-out and set-off provisions.
Master agreements help to standardise and clarify procedures in a market, adding to operational efficiency andliquidity; they provide legal certainty by setting out the contractual terms and conditions accepted by the parties,
which is reinforced where legal opinions are commissioned; and they facilitate risk reduction by providing procedures
such as margining, the netting of opposite payments and transfers and, in an Event of Default, close-out and set-off,which are recognised by reductions in regulatory risk capital requirements.
Mini close-out: An informal term for the remedy available to the Seller, under the GMRA, of terminating an individual
repo on which there has been a failure to deliver equivalent collateral by the Buyer on the Repurchase Date.

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AnnexMinimum transfer amount: A common term for a margin threshold. This term emphasises the point that, when Net
Exposure reaches or breaches the margin threshold, it should be eliminated.
Modified Following Business Day Convention: This is the rule that is most commonly applied in the foreignexchange and money markets, including the repo market, to determine the maturity of an instrument. The convention
is that, for terms to maturity which are multiples of one month, the maturity will fall in the month which is the same
number of calendar months after the month in which the value date falls. For example, if the value date of a 3-monthtransaction is in March, then the maturity will fall three calendar months later, which means in June. Furthermore, thematurity will be the same date as the value date, unless this date is not a Business Day, in which case, it will be thenext Business Day in the same calendar month. However, if the next Business Day would fall in the following calendar
month, the maturity will be the last Business Day in the same calendar month. For example, if the value date of a
3-month transaction is 29 March, the normal maturity would be 29 June. If, however, the 29 June is not a Business
Day, then the maturity would be 30 June. If 30 June is also not a Business Day, then the maturity would be 28 Juneand so on. See also the end/end rule.
Net Exposure: In the GMRA, the term for the credit exposure of one party to another on a portfolio of repos andreverse repos documented under the same agreement. Specifically, the Net Exposure is the difference between (1)the aggregate of the Transaction Exposures of one party to the other, plus the Net Income due to the first party but
unpaid, less the Net Margin, if any, held by the first party and (2) the aggregate of the Transaction Exposures of theother party to the first, plus the Net Income due to the other party but unpaid, less the Net Margin, if any, held by theother party. If (1) is greater than (2), the first party has a Net Exposure and may make a margin call. See paragraphs2(dd) and 4(c) of the GMRA 2000 and paragraphs 2(ff) and 4(c) of the GMRA 2011.
Netting: The process of off-setting mutual obligations between two parties to calculate a net claim or obligation.
One week: The term from and including the value date of a transaction up to but excluding a maturity date sevendays later or, if that day is not a Business Day, the next Business Day thereafter. If the next Business Day is in the next
calendar month, it still becomes the maturity date. In other words, the following business day convention applies, not
the Modified Following Business Day Convention.
Open repo: Also known as a repo that is terminable on demand or a demand repo. This is a repurchase agreementin which the Repurchase Date is not fixed at the start but is called by either party giving due notice to the other.
Interest is usually calculated daily but is rolled over without compounding and paid monthly or, if there is only one opentransaction and it is terminated before the month-end, on the Repurchase Date.
Overnight (O/N): The term from and including today up to but excluding the next Business Day or, if that day is
not a Business Day, the next Business Day thereafter. If the next Business Day is in the next calendar month, it still
becomes the maturity date. In other words, the following business day convention applies, not the Modified Following
Business Day Convention.
Overnight indices (OI): In many currencies, an interest rate index is calculated and published daily for actualinterbank transactions by a selected panel of banks, or recorded by voice-brokers, in overnight unsecured deposits
over the entire course of several hours. OI are weighted-average rates, where each individual rate is weighted by the
total amount of deposits transacted at that rate. The rates that go into an OI are offered rates.
Partialling: The delivery of less than the contracted amount of a security sold in a cash trade or repo. Partialling
does not satisfy the contractual obligation of the seller but it reduces the adverse impact of the failure to deliver thefull amount.
Pledge: A type of security interest which is a property interest in an asset, given by a borrower (pledgor) to a lender(pledgee) to secure a debt. This interest gives the secured lender the right to seize and liquidate the asset in theevent that the borrower defaults. Until then, the borrower retains a property interest in the asset, which means thatthe asset cannot be sold by the secured lender, unless the borrower has given him a right of re-hypothecation. Upon
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the discharge of the debt by the borrower, the secured lender must return a legally identical asset. Sometimes calleda ‘pawn’.
Purchase Date: In the GMRA, the term for the value date of a repo.
Purchase Price: In the GMRA, the term for the sum of money paid by the Buyer to the Seller on the Purchase Dateof a repo. It is equal to the Market Value of the collateral less any Margin Ratio or Haircut.
Regular dates or round dates or fixed dates: Maturities of one week, two weeks, three weeks, one month, twomonths, three months, four months, five months, six months, seven months, eight months, nine months, 10 months,
11 months and one year, or some sub-set (a minimum definition would include only one week, one month, threemonths, six months and one year). These dates derived from ‘brokers’ runs’, which were the terms for which voicebrokers would automatically provide quotes when asked for an indication of prices in the inter-bank forward foreignexchange or deposit markets.
Re-hypothecation: The right which a pledgor can give to a pledgee to sell or repo pledged assets. Without theright, the pledgee can only sell pledged assets in an Event of Default by the pledgor. If the pledgee exercises a rightof re-hypothecation, the pledgor’s right to recover the pledged asset is replaced by an unsecured contractual rightto receive an equivalent asset. Re-hypothecation is typically given by hedge funds to their prime brokers in return forcheaper funding.
Repriced: In the GMRA, a method that can be used to eliminate a Net Exposure by accelerating the Repurchase
Date of a repo and entering into a Repriced Transaction for the same date. The Repriced Transaction will have a newPurchase Price that is calculated by applying the latest-available market price of the collateral to the original nominal
value to calculate a new Market Value, to which any agreed Margin Ratio or Haircut is applied.
new Purchase Price =New Market Value
Margin Rationor

new Purchase Price = new Market Value (1- Haircut)
The new Purchase Price is the cash amount which the Buyer is obliged to pay to the Seller in the new transaction.
In other words, the Purchase Price is brought into line with the latest Market Value of the collateral. The nominal
amount of collateral does not change. As the collateral transfers and cash flows of the terminated transaction and theRepriced Transaction are netted where possible, only the differences between the Repurchase Price on the Repricing
date and the new Purchase Price will actually have to be paid (which means that repo interest accrued up to the dayof Repricing is paid to the Buyer). By netting, Repricing achieves a margin transfer of cash. By netting, Repricing is analternative to Margin Maintenance. It is designed for sell/buy-backs but can be applied to repurchase agreements.
The related method of Adjustment involves changing the Market Value of the collateral rather than the Purchase Price.
“Repricing” is commonly used as a generic term to describe both Adjustment and the above method. See GMRA
2000 paragraph 4(j) and GMRA 2011 paragraph 4(k).
Repo: The generic term for repurchase agreements and sell/buy-backs. Repos (along with securities lending) are atype of securities financing transaction (SFT). In a repo, at the start of the transaction (the Purchase Date), one party(the Seller) sells assets (the collateral, which are typically securities) to another party (the Buyer) at one price (thePurchase Price) and commits to repurchase assets which are equivalent to those sold on the Purchase Date at afuture date or on demand (the Repurchase Date) at an agreed or calculable but different price (the Repurchase Price).
Repo interest: The market term for the return to the Buyer on the cash he effectively lends through a reverse
repo. Legally-speaking, however, the term is a misnomer, as the legal form of a repo is not an interest-paying loan
or deposit. Rather, the return is just the difference between two securities prices. Under the GMRA, repo interest iscalled the Pricing Differential.
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AnnexRepo rate: The market term for the annualised percentage rate of interest on the cash in a repo. Legally-speaking,however, the term is a misnomer, as the legal form of a repo is not an interest-paying loan or deposit. Rather, thereturn is just the difference between two securities prices. Traditionally, the repo rate was the price of a repurchaseagreement, but sell/by-backs are now often quoted in the same way. Under the GMRA, the repo rate is called thePricing Rate.
Repurchase agreement: Also known as a classic repo, US-style repo or all-in repo. In some countries, there arealso domestic names for this type of repo. A repurchase agreement is a type of repo which is documented undera master agreement, in consequence of which, both legs of the transaction form a single contract. Among otherthings, a master agreement makes provision for: initial margins and/or Haircuts at the start of a repo; margin calls
during the term of a repo; the ability of the Buyer to grant rights of substitution to the Seller; the immediate making
of a manufactured payment to the Seller upon the payment of coupons, dividends or other Income on the collateralduring the term of a transaction; and close-out and set-off in an Event of Default by either party. Cf sell/buy-back.
Repurchase Date: In the GMRA, the term for the maturity of a repo.
Repurchase Price: Under the GMRA, the term for the sum of money paid by the Seller to the Buyer on the
Repurchase Date to buy back equivalent collateral. It is equal to the Purchase Price plus repo interest. This term also
applies to the accrued value of the cash due to the Buyer on any day during the term of a repo, that is, the Purchase
Price plus accrued return up to that particular date. In the case of sell/ buy-backs, the Repurchase Price is net ofany manufactured payment due to the Seller following the payment of a coupon, dividend or other Income on thecollateral plus re-investment income to compensate for the delayed payments.
Re-rate: Market terminology for re-fixing the repo rate on a floating-rate repo or changing the repo rate on an open
repo.
Reverse repo: The Buyer’s side of a repo. The Buyer is said to ‘reverse in’ collateral (whereas the Seller is said to‘repo out’ collateral).
Right of Substitution: The right that may be given by the Buyer to the Seller, during the negotiation of a repo, torecall equivalent collateral during the term of the transaction and substitute collateral of equal quality and value that isreasonably acceptable to the Buyer.
Securities financing transaction (SFT): The family of financial instruments in which a security is provided against a
payment of cash. SFT include repo, securities lending and margin lending but not the collateralisation of derivatives.
Security interest: An umbrella term for a property interest in an asset, given by a borrower to a lender to secure a
debt. This interest gives the secured lender the right to liquidate the asset in the event that the borrower defaults.
Until then, the borrower retains a property interest in the asset, which means that, absent a default by the borrower,
the asset cannot be sold by the secured lender, unless the borrower has given him a right of re-hypothecation. Upon
the discharge of the debt by the borrower, the secured lender must return a legally-identical asset. A common typeof security interest is a pledge. Others include charges and mortgages.
Securities lending: Securities lending transactions (along with repos) are a type of securities financing transaction(SFT). In a securities lending transaction, one party (the Lender) transfers title to a security or basket of securities
to another party (the Borrower) in exchange for either (1) title to another security or basket of securities or (2) cash(the collateral), and the payment of a fee, and commits to either (1) transfer title to equivalent collateral or (2) repay
cash plus an agreed return at a future date or on demand, in exchange for title to a security or basket of securities
equivalent to the one it transferred at the start. Despite securities lending counterparties being called Lenders andBorrowers, title to securities is transferred (at least outside the US), as in repo.
Securities lending transactions and repos are analogous instruments in legal and economic terms. The maindifferences are that: securities lending does not necessarily involve cash (it can be security against security); is
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generally driven by the demand to borrow specific securities (rather than cash); and tends to be transacted on an
open basis. The standard master agreement for securities lending is the ISLA GMSLA.
Sell/buy-back: A type of repo, different to a repurchase agreement. Sell/buy-backs are economically identical torepurchase agreements and, just as in a repurchase agreement, the collateral in a sell/buy-back is transferred bymeans of a transfer of legal title. The main differences are that sell/buy-backs are not necessarily documented undera master agreement. In the case of undocumented sell/ buy-backs, the two legs of the transaction form separate
contracts. Because of this, it is not possible to margin undocumented sell/buy-backs or grant rights of substitution
to the Seller. Because of the lack of documentation, there is also no express provision for: initial margins and/or
Haircuts at the start, or close-out and set-off in an Event of Default by either party. Manufactured payments have to bedelayed until the Repurchase Date and incorporated into the Repurchase Price. Lack of documentation also makes
undocumented sell/buy-backs legally less robust.
Since 1995, it has been possible to document sell/buy-backs using the Buy/ Sell-Back Annex of the GMRA.
Undocumented sell/buy-backs are increasingly giving way to the documented version, under pressure from regulatory
requirements for written legal agreements, margin and express rights of close-out and set-off. The difference between
repurchase agreements and documented sell/buy-backs now rests mainly in the mechanisms used in the latter toeliminate credit exposures due to fluctuations in the Market Value of collateral. While repurchase agreements typicallyuse margin to re-align the values of cash and collateral, documented sell/buy-backs achieve the same result throughthe termination of the transaction and simultaneously creation of a new transaction for the remaining term to maturity,with the values of cash and collateral re-aligned, but otherwise typically on the same terms as the original transaction(there are two options: Adjustment or Re-Pricing). These alternatives to margin are helpful in avoiding legal difficulties
over margins that arise in some jurisdictions.
Also known as a buy/sell-back, buy/sell or sell/buy. In some countries, there are also domestic names for this type ofrepo. Strictly-speaking, a sell/buy-back involves the borrowing of cash, while a buy/sell-back involves the lending of
cash (and is therefore equivalent to a reverse repo).
Seller: In the GMRA, the party to a repo who sells collateral for cash in the form of the Purchase Price on thePurchase Date and commits to buy back equivalent collateral on the Repurchase Date – which will be a fixed maturity
or, in the case of open repo, on demand – at an agreed or calculable Repurchase Price. The Seller is effectively
borrowing cash. Cf Buyer.
Set-off: A legal technique for the netting of mutual obligations between two parties. One party’s obligations to anotherare extinguished to the extent of the other party’s mutual obligations to the first party. Another legal technique toachieve netting is by ‘novation’. Netting by novation involves the creation of two new contracts (introducing a new
party) from a single original contract (this happens at some CCP) or the creation of one new contract from two originalcontracts (this happens in master agreements). Set-off occurs in the event of one party defaulting, whereas netting
by novation occurs as soon as a deal is transacted.
Shaping: The practice of dividing deliveries of securities into smaller amounts before instructing a securities settlement
system, in order to minimise the effect of any settlement failures. A standard ‘shape’ is 50 million.
Short dates: Maturities that are one month or less in the future.
Short-selling: A sale in a cash trade of securities that are not owned by the seller. The seller should borrow the
securities in order to be able to fulfil his commitment to deliver those securities to the buyer. He can do this in therepo or securities lending markets. The short-seller will then have to purchase the securities at a later date in orderto return to the seller/lender in the repo or securities lending transaction. In the meantime, he is exposed to the riskof a rise in the price of the security (as well as any positive cost of carry) and the risk that it may not, in practice, bepossible to buy the security because of market illiquidity. Short positions may be established in order to hedge longpositions in similar securities or related derivatives, or to arbitrage. Short-selling with no intention of delivering is called‘naked short-selling’.
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AnnexSpecial collateral: Collateral on which the repo rate is materially below the GC repo rate for the same term. Thisdifferential is caused by the demand for a particular piece of collateral which is manifest in offers of cheap cash frompotential Buyers in the repo market. Cf GC repo.
Spot-next (S/N): The term from and including the spot value date up to but excluding the next Business Day or,if that day is not a Business Day, the next Business Day thereafter. If the next Business Day is in the next calendar
month, it still becomes the maturity. In other words, a following business day convention applies, not the Modified
Following Business Day Convention.
Synthetic repo: A combination of instruments to replicate the risk/return of a repo. A synthetic repo is constructedfrom a cash trade and derivatives such as a total return swap, a futures contract or a combination of options. The
derivative(s) replace the repurchase leg of a repo. Synthetic repos are entirely off-balance sheet (whereas a repo
leverages the balance sheet of the Seller).
Term repo: A repo with a term of one year or more. These are often used in collateral swaps. They are structured
and floating-rate, and have deep Haircuts and enhanced Rights of Substitution.
Terminable on demand: Of an open repo, in which either party has the right to terminate the transaction by
providing due notice.
Tom-next (T/N): The term from and including the next Business Day up to but excluding the following Business
Day or, if that day is not a Business Day, the next Business Day thereafter. If the next Business Day is in the next
calendar month, it still becomes the maturity date. In other words, a following business day convention applies, not
the Modified Following Business Day Convention.
Trade-matching: The comparison of settlement instructions from two parties to a transaction by a custodian bankacting as securities settlement agent for one or both, or by a CSD or ICSD, in order to ensure that the settlement ofthat transaction across a securities settlement system (SSS) at a CSD or ICSD will not fail because of differences in
the instructions from the two parties. Cf affirmation and Confirmation.
Trade repository: A specialised institution, part of the infrastructure of the over-the-counter (OTC) market, to whichmarket users report the details of their transactions in a particular instrument or class of instruments, and/or the
resulting positions, typically to satisfy regulatory requirements. The repository stores these data and provides accessto supervisors and certain other official agencies to assist the regulation of individual firms, the supervision of markets
and the monitoring of systemic risk. The repository will also publish aggregated statistics in order to enhance market
transparency for users.
Transaction Exposure: In the GMRA, this is the difference between the Repurchase Price (adjusted by any inital
margin) on the date of the calculation and the Market Value of the collateral (adjusted by any Haircut) on the sameday. In other words, Transaction Exposure measures the current credit exposure or mark-to-market exposure of one
party to another. See GMRA 2000 paragraph 2(ww) and GMRA 2011 paragraph 2(xx).
Transfer of title: The transfer of the full property rights to an asset from one party to another. The result is that the
new owner has the unfettered right to do what he wishes with the asset and the right to all benefits of ownership (egcoupons). In repo, transfer of title takes place through a true sale of the asset. Cf security interest.
Tri-party repo: A repurchase agreement in which a third-party agent (who is the custodian bank for both the parties)
undertakes the settlement, custody and post-trade management of the transaction. Settlement is made by bookentry transfers between accounts on the books of the agent and so avoids the cost of settling across a CSD. The
services of tri-party agents include the automatic selection of collateral from the account of the Seller, subject tocollateral eligibility criteria predefined by the Buyer, margining, management of manufactured payments and theautomatic ‘optimisation’ of collateral. Optimisation means ensuring that the collateral held by the Buyer is always of thelowest quality acceptable to the Buyer (this means the Seller is making the most efficient use of his collateral, while
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the Buyer is earning the highest return). Optimisation is achieved by substituting existing collateral with new collateral
whenever the Seller purchases a security of lower but still acceptable quality. The tri-party agent will also substitutewhen the Seller wishes to sell a security he has repoed out as collateral, or when collateral is no longer acceptable
to the Buyer (eg because of a ratings downgrade) or when collateral is due to make an Income payment that mightcause tax problems. Cf delivery repo and HIC repo.
Two weeks: The term from and including the value date of a transaction up to but excluding a maturity date 14 days
later or, if that day is not a Business Day, the next Business Day thereafter. If the next Business Day is in the next
calendar month, it still becomes the maturity date. In other words, a following business day convention applies, not
the Modified Following Business Day Convention.
Three weeks: The term from and including the value date of a transaction up to but excluding a maturity date 21days later or, if that day is not a Business Day, the next Business Day thereafter. If the next Business Day is in the next
calendar month, it still becomes the maturity date. In other words, a following business day convention applies, not
the Modified Following Business Day Convention.
Voice-broker: An agent who matches parties, typically financial intermediaries, who wish to transact financial
instruments. The voice-broker collects prices from customers willing to quote and broadcasts the best bid price andthe best offer price back to all his customers, without revealing who is quoting these prices (pre-trade anonymity).
When genuine interest is expressed in one of these prices, the voice-broker puts the party expressing interest in touchwith the party quoting the price and the two parties settle the transaction between themselves. The voice-broker is
not a principal intermediary in the transaction and earns a commission rather than a bid/offer spread. Although voicebrokers originally broadcast prices over dedicated loudspeaker systems installed in customers’ offices, they now tend
to broadcast prices on screens.

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AnnexAnnex VII: Citations
Asian Development Bank Institute, “The Development of Local Debt Markets in Asia,” November 2011
Asia Development Bank, “ASEAN + 3 Bond Market Guide, Part 1: Bond Markets and Their Infrastructuresin ASEAN+3,”
Bank for International Settlements, Committee on the Global Financial System, “Asset encumbrance,
financial reform and the demand for collateral assets,” May 2013
Bank for International Settlements “Strengthening repo clearing and settlement arrangements”.
Committee on Payment and Market Infrastructures (formerly CPSS) and International Organization for
Securities Commissions, “Principles for Financial Market Infrastructures,” April 2012
BIS Committee on the Global Financial System, “Asset encumbrance, financial reform and the demand forcollateral assets,” May 2013
Eli Remolona, Frank Packer, inter alia, “Local currency bond markets and the Asian Bond Fund 2 Initiative”
January 2012
EMEAP, Repo Markets: State of Play, 2014
Euroclear, “Understanding Repos and Repo Markets,” March 2009
Federal Reserve Bank of Chicago, “The scarcity value of Treasury collateral: Repo market effects of
security-specific supply and demand factors,” November 2013
FSB, Securities Lending and Repos: Market Overview and Financial Stability Issues, April 2012
International Capital Market Association, “Frequently Asked Questions on Repo,” May 2015
International Capital Market Association, “ERC Guide to Best Practices in European Repo Market,” March
2014
International Capital Market Association white paper on the operation of the European repo market, the roleof short-selling, the problem of settlement failures and the need for reform of the market infrastructure, July
2010

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IMF, “A Framework for Developing Secondary Markets for Government Securities,” July 2008
Manmohan Singh, IMF Working Paper, “Velocity of Pledged Collateral,” November 2011
Michael Manna, Barclays, “Repo Market – Masterclass,” May 2014.
Nicholas de Boursac, “Government Bond Secondary Market Liquidity: Seven Basic Requirements,” February 2012.
Re-using the collateral of others, European University Institute, Vincent Maurin,
Ryuichi Shiina of Japan Securities Dealers Association, Working document for the ABMF, “Enhanced Comparative
Analysis of Repo Markets in 9 ASEAN + 3 Countries & Jurisdictions,” 15 April 2014.
World Bank, Repo markets handbook, March 2010

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