Розвиток соціально–економічних відносин в умовах трансформації України
Банківська система україни в умовах глобалізації фінансових ринків
Repurchase agreements as an instrument of monetary policy in ukraine
Vysochynska o.v., larionova k.l., ruda n.s.
Khmelnytsky national university
В даній статті дається характеристика операцій репо і їх значення для проведення грошово- кредитної політики нбу. Обґрунтовано важливість операцій прямого і зворотного репо для регулювання ліквідності в банківській системі.
Necessity of research. Modern financial markets can be hardly imagined without repo transactions, which have become its essential part during the last ten years. Nowadays repo markets are not only one of the biggest and most developed international financial market segment, but also an extremely important mechanism of their stabilization and integration into a single financial space. Furthermore, repurchase agreement is a main market instrument, which helps central banks and financial market's participants to achieve understanding.
In ukraine repo transactions are not widespread.
Analysis of last issues. Study of the literary source shows that many economists have analised questions connected with banking transactions, especially repo transactions. Possibility of using repurchase agreements in a monetary policy was considered in works of such economists as m. Fisher, m.j. fleming, k.d. garbade, s.a. lumpkin, g. Oksenoit and others. Ukrainian economists shall turn to a foreign experiment for setting up a base for a successful use of these transactions in ukraine.
The aim of this article is to give a definition of a repurchase agreement and to emphasize its role as an important instrument of monetary policy in ukraine.
Statement of the main material. Repurchase agreement (repo) is a financial instrument used in the money markets and capital markets. A more accurate and descriptive term is sale and repurchase agreement.
A repo is a written agreement that provides for a "sale" and "repurchase" of a security or securities (the underlying securities, or the collateral). The purchaser agrees to purchase the underlying securities at a specific price and the seller, or "counterparty", agrees to repurchase the same securities on a specific date for a specified price, plus an additional amount that reflects the time value of the purchaser's investment from the date of purchase of the underlying securities to the date of their repurchase by the seller.
A repo consists of two legs or transactions. The start leg of the repo consists of the repo party transferring securities to and receiving funds from the reverse party; and the close leg consists of the reverse party transferring securities to and receiving principal and interest from the repo party. Based on these characteristics, repos are considered loans collateralized by government securities .
The rate of interest to be paid on a repo loan is a repo rate.
According to an international practice a category of repurchase agreements includes:
a) Repo transactions - repo and reverse repo;
b) Transactions of selling with a back redemption (redemption with a back selling) - sell/buy backs (buy/sell
c) Transactions of counter-crediting by securities and funds or crediting against securities - collateralized lending/loans (combination of securities lending with a cash lending or cash lending against a pledged securities loan).
A general characteristic of all these transactions is a transfer of securities in exchange for getting money assets with a reverse interchange of assets between counteragents after a fixed period. Only legal forms of realization of these transactions are different. In first two cases it is a transaction of purchase and sale of securities (with a concomitant passing of property on securities from a seller to a buyer).
In the last case there are two counter transactions of loan (on money and securities) or a transaction of funds advance against securities (in this case a creditor's disposal of pledged securities, as a rule, is appreciably restricted because of passing property absence). A choice of a legal form of repo process is determined by a specific character of national laws.
From an economical point of view all transactions listed above are varieties of collateralized credits: money credits under guarantee of securities or credits on securities under security of money assets. Namely, the property of security defines that important role, which repo transactions play among instruments of monetary policy and in the structure of international financial markets as a whole. Government securities are the basic assets for repo transactions [1, p.21-22].
A reverse repo is simply a repurchase agreement as described from the cash provider's perspective, as the cash provider is not the repurchasing party, but the reverse i.e. The party from whom the security is repurchased. Hence, the cash receiver executing the transaction would describe it as a "repo", while the cash provider in the same transaction would describe themselves as executing a "reverse repo". So "repo" and "reverse repo" are exactly the same kind of transaction, just described from opposite viewpoints. The schemes of these transactions are shown on the picture 1.
A reverse repo
Funds + interest
Funds + interest
A repo (from the dealer's perspective) finances the dealer's long position (collateralized borrowing).
A reverse repo (from the dealer's perspective) finances the dealer's short position (collateralized lending).
Picture 1 — a schemes of a repo and a reverse repo .
A sell/buy back is the spot sale and a forward repurchase of a security. The basic motivation of sell/buy backs is generally same as for a classic repo i.e. Attempting to benefit from the lower financing rates generally available for collateralized as opposed to non-secured borrowing. The economics of the transaction are also similar with the interest on the cash borrowed through the sell/buy back being implicit in the difference between the sale price and the purchase price. There are a number of differences between the two structures. A repo is technically a single transaction while a sell/buy back is a pair of transactions (a sell and a buy). A sell/buy back does not require any special legal documentation while a repo generally requires a master agreement to be in place between the buyer and seller.
A buy/sell back is the equivalent of a reverse repo .
In ukraine repo transaction is able between financial and credit institutions (nbu, commercial banks, investment companies etc.) And participants of the financial market (nbu, commercial banks, investment companies, financial organizations, private persons, participants of a stock market).
Thus, if an agreement is concluded between bank and a client a repo transaction for a bank will be a credit transaction in economical matter. Bank gives his client an indicated amount of money on a determined period of time getting collateral securities. At the same time bank gets a payment in the form of variation in prices (a price of selling and a price of buying) or as an interest on a value of securities. A risk of a securities' devaluation totally lays upon a client because he will buy these securities out on a beforehand fixed price, not on a market price. In case, if a client cannot buy securities out because of some reasons present credit risk reduces at the cost of a loan guarantee by collateral securities .
Repurchase agreements can be used as an instrument of a monetary and credit policy. The earliest experiments of using it took place in the usa in the 20th. Its regular application began in canada since 1953 and in the usa since the 60th. Since the 70th central banks of germany, italy, the netherlands has been starting to use repo transactions in their monetary and credit policy.
In ukraine nbu can carry out transactions of repo and reverse repo with banks for a regulation of banking system liquidity according to the main current positions.
Banks that need a support of their short-term liquidity can make a request to nbu about carrying out repo transactions. If there are a superfluous liquidity in a banking system and monetary aggregates increase faster than needed nbu can sell its own government securities (treasury bills, nbu's certificates of deposit, municipal bonds etc.) By using a reverse repo.
Purchase and sale of government securities during repo and reverse repo transactions occur on the market or balance price (if there is no an active stock market).
Repo rates are used for a setting upper limit of a short-term interest rate corridor on the interbank credit market. Lower limit is set by using a reverse repo rate [1, p.23].
Nbu can carry out transactions in the open market of purchase and sale of government securities by a direct arrangement with banks or by holding a tender of bank's requests for a participation in repo transactions. Banks give their requests to the department of monetary policy of nbu. In these requests they propose their conditions about price of purchase and sale of government securities. During a tender nbu selects those bank's requests, which suit it best because of their price factors (cheaper for purchase and more expensive for sale) or nbu needs to have concrete government securities in its securities portfolio. After a tender banks that have got a right on a purchase and sale of government securities are sent nbu's notifications of confirmation about an intention to make a contract of repo and reverse repo transactions.
Depending on a maturity nbu can carry out such repo and reverse repo transactions:
a) Overnight repo, which refers to a one-day maturity transaction;
b) Term repo, which refers to a repo with a specified end date, a fixed rate, and is liquid;
c) Open repo, which simply has no end date. The rates are variable or set daily; they roll or terminate at the request of either party.
It is necessary to notice that sold securities because of repo transaction are not charged off from a bank statement and acquired securities because of a reverse repo are not taken into account in a bank statement during the term of agreement.
Repurchase agreement is not represented in an accounting of securities seller, because it does not fall under determination of professional activity at the equity market. It does not foresee the sale of securities to the third persons,
Because securities' passing of property happens only between two sides.
Securities, used in repo transaction, are not represented in a general delivery securities' buyer's balance on securities' accounts, because their salesman is still the owner of these securities. Thus, from economic point of view repurchase agreement is a transaction of crediting, not purchase, and consequently, it is taken into account as a loan but not as an asset (securities) .
Conclusions. Repurchase agreements play an important role in the nbu's implementation of monetary policy. Repurchase agreements are used to manage the quantity of reserves in the banking system on a shortterm basis. By undertaking such transactions with primary dealers, the nbu can temporarily increase or decrease bank reserves. Repo transactions, carrying out by central banks, in contrast to outright sales and purchases in open market:
a) Do not expect an obligatory availability of high liquid equity markets, which are repo guarantees;
b) Do not expect the availability of a strict connection between terms of repo transactions and terms of securities payment, which are guarantees of repos;
c) Practically do not influence on the market prices of securities that are used in these transactions.
As a whole the main confessedly advantage of repurchase agreements in an international practice is a market character of these transactions. Due to a low risk repo transaction is one of the cheapest sources of bringing in additional liquidity and achievement of the multiply effect, which, in general, reduce the expenditures of stock and share markets' participants and their clients.
The advantages of repos are self-evident. Therefore we are confident that repos will also prove their worthiness as an important monetary policy instrument in ukraine.
Оксенойт г. Операции репо: обзор международного опыта // рынок ценных бумаг. - 2001. - № 16. -
www.atlantafed.org - m. Fisher. Special repo rates: an introduction.
www.en.wikipedia.org - repurchase afreement
www.financialpolicy.org - financial policy forum 2006. R. Dodd. "repo" or repurchase agreement
www.newyorkfed.org - m.j. fleming, k.d. garbade. The repurchase agreement refined: gcf repo.
www.richmondfed.org - stephen a. Lumpkin. Instruments of the money market.
www.ukragroportal.com - угоди репо як інструмент фінансового ринку україни
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