Frequently Asked Questions
What is the difference between a repo and cash bond buy-in?
The market for cash bonds largely follows ICMA buy-in rules (except for specific domestic rules) which allow earliest buy-in after failure to settle in five business days. Repo follows GRMA rules where the earliest buy-in is one business day.
When margin payments are due, is it better to pay cash or securities?
General market practice is to accept only collateral or margin that is of the same or better quality than the underlying trade. In some cases, only cash will be accepted as margin payment and that wholly rests on the counterparties' credit rating and individual agreements.
Why do I sign two master agreements with UBS?
Master agreements are signed between legal entities, thus for UBS we sign international market standard documents 1996 MRA for UBS Securities LLC and 2000 GMRA for UBS Ltd.
Are there other master repo agreements?
Yes, domestic jurisdictions are likely to use their own version for domestic securities.
What does risk-on-risk mean?
It is the likely correlation between a bond issuer and counterparty, which can create accelerated collateral price volatility, eg UBS pledging UBS bonds as collateral.
What does rehypothecation mean?
The legal title of the asset is transferred for the period of the repo trade, thus allowing the borrower to re-lend the bond onwards. It differs from a collateral pledge.
What is the difference between a buy/sell-back and a repo?
Documentation, margining, tax status and coupon treatment are all different between the two methods.
How do I get my coupon back?
Repo transactions pass coupon payments directly back to the underlying beneficial owner. Buy/sell-backs include coupon cash flows in their termination cash settlement. Implied coupon reinvestment is therefore assumed at the repo rate.
What constitutes an event of default?
The definition of a default is complicated and sensitive in the market as it can have significant repercussions on the treatment of financial products, eg credit default swaps. In repo a failure to deliver bonds does not constitute a default, however failure to pay margin can. Treatments and interpretation of a default varies. For a detailed explanation you should contact your UBS relationship manager.
What is the longest term possible for a repo?
Repo documentation supports trades that are under one year maturity, hence 364 days is the maximum. However, longer dates repo can be constructed via a strip of forward starting repo, which effectively replicate a synthetic longer dated repo.
Why should I lend my securities so that dealers can go short and drive down the value of my investment?
For larger, efficient markets there will be an active repo market, which will facilitate the shortening of securities and thereby improve overall liquidity. Increased liquidity generally improves market acceptance of that security which can lead to overall better performance of a security.
Are the revenues worth the hassle and operational cost?
It depends on the approach. A passive approach can reap significant benefits even for smaller portfolios. Simply submit your portfolio to the UBS custodian/agency programme and any lending is administered for a small fee, saving you operational costs and time. Conversely, an active approach requires full participation in the repo markets via brokers, interdealers and wholesale houses. This works well for larger portfolios.