Bank liquidity is the ability of a financial institution to fully fulfill all obligations, strictly adhering to deadlines. To maintain liquidity standards at the appropriate level, credit organizations are actively attracting material resources from various sources. Moreover, they can be not only internal, but also external. The source of funds in the domestic market of the state is the Central Bank of Russia. He is responsible for the liquidity of the entire banking system. Here is the time to ask what a repo is, after all, this particular transaction is the main refinancing tool in this situation.
REPO: definition
Repo in English sounds like a repurchase agreement. This is a transaction that consists of two parts: the purchase of securities and their further sale at the agreed time and at the agreed cost. REPO operations can be compared with lending, the pledge of which are securities drawn up by the lender. The cost of the loan itself, or discount, is the difference between the initial cost of selling and acquiring securities. Studying the question of what is a REPO, it is necessary to take into account the bilateral nature of this mechanism.
Features of transactions
The main advantage of the REPO transaction mechanism is a high reliability indicator. It can be noted the availability and technical simplicity of the operation. The price of credit funds provided under repurchase transactions is minimal. This is due to the almost complete absence of risks. If, due to objective circumstances, it is not possible to implement the second part of the agreement, say, the borrowing organization is not able to buy back the securities, the creditor transfers to the category of holder of the securities legally.
Characteristics of transactions
In order to understand what a repo is, consider the main characteristics and parameters of this category of transactions. It can be distinguished:
- The term transaction.
- Type or composition of collateral.
- Discount.
Depending on the duration of these transactions are:
- Intraday, also known as overnight. They are concluded no more than a day.
- Urgent, which have a fixed maturity.
- Open, for which no maturity has been established.
In a situation where the first part of the agreement has already been completed, and the term for the implementation of the second part of the transaction has not yet expired, the repo is called valid. When the first part of the agreement is completed and when the deadline for the second part of the transaction is open, the repo is called open. For urgent operations and overnight, a fixed rate is characteristic. For open positions, a floating rate is used.
Consider the example of Russia, what is a REPO. The Central Bank of the Russian Federation provides funds for repos for a period of 1 and 7 days, 3 and 12 months. Transactions lasting 3 months and a year are not carried out systematically. For their implementation, an individual decision of the Central Bank is necessary. Hence the conclusion that repos are just a short-term source of liquidity.
REPO operations in foreign currency in the commercial segment
A REPO operation is often carried out between the Central Bank of the Russian Federation, which is a creditor, on the one hand, and a commercial bank, which takes on the role of a borrower, on the other hand. Two commercial banks can take part in transactions at the same time. The rate in this situation is determined solely on the basis of interbank market rates. They are tied to the terms of lending and to the quality of the securities themselves. A REPO transaction in foreign currency between credit enterprises and the Central Bank can be carried out on the Moscow Exchange, the St. Petersburg Exchange, as part of the Bloomberg structure. To be eligible to participate in tenders, financial institutions must meet a number of criteria, which are established by the Central Bank. Securities included in the Lombard list may act as collateral in all transactions with the Central Bank. They are considered to be highly reliable and liquid. A full Lombard list of securities is published every day in an updated form on the official website of the regulator.
What papers are not accepted as security?
As collateral, the Central Bank accepts only securities that meet certain requirements. The following may not be taken as a pledge:
- Securities issued by the bank itself, which is the second party to the transaction.
- Securities issued by any financial institution that has any partnership with a bank acting as a borrower in a repo transaction.
- Bonds with a maturity of less than 2 days.
Based on the repo duration, for each category of securities, the Central Bank of the Russian Federation establishes the primary, maximum and minimum price levels, discounts. The discount appears in this situation as the difference between the purchase price and the buyback price of securities. The primary discount determines the amount of funds that the Central Bank of the Russian Federation provides to a credit institution in the first part of the agreement. The maximum and minimum price levels are used to calculate the current discount for the entire duration of the repo transaction.
Liquidity direction: auctions
To ensure liquidity of the entire banking system through the use of repos, the CBR practices two main areas. Let's start by concluding agreements that are based on a repo auction. This area of liquidity is characterized by the presence of a limit on the funds provided as part of the auction. The direction depends on the situation that exists in the foreign exchange market of Russia, and the availability of a minimum interest rate. Each of the bidders has the right to submit an application, where he is obliged to indicate the repo rate, which can be either higher or equal to the minimum. Information on the results of the auction is published on the website of the Central Bank of the Russian Federation. Thus, the REPO auction provides an opportunity for potential borrowers to compete for favorable terms of partnership with the Central Bank of Russia.
Fixed rates
The direction of partnerships based on fixed rates allows the Central Bank to attract material resources for only a day. The deal is called overnight. The rate is provided on fixed terms, and at the same time it is an order of magnitude higher than the minimum. This category of partnership arrangements is implemented daily.
Over the past few years, the amount of capital attracted by credit organizations to repurchase auctions has been systematically increasing. This signals that it is the repo mechanism in foreign currency that currently acts as the dominant liquidity instrument of the domestic banking system, which is used to refinance the financial segment.
Legislative weaknesses
In accordance with the Civil Code of the Russian Federation, currency repos are not classified as a separate category of transactions. At the level of legislation, partnership is perceived as the performance of two transactions at the same time (purchase and sale) or as the provision of borrowed funds for a certain type of security.
There are precedents in history when repos were recognized as invalid. It hid the fact of secured lending. As soon as the transaction was declared invalid, the repo itself lost all its advantages over the standard lending scheme. In court proceedings, the emphasis was on the fact that the property repurchase agreement clearly stated that this property itself was a direct guarantee.
