Repo Terminology
Callable repos
Some repos are callable. This means that at the start of the transaction, the buyer (cash lender) negotiates the right to close the trade within an agreed period of time (usually 24 or 48 hours). Also known as ROE24 or ROE48.
Callable repos are very counterparty specific. For example, domestic counterparties who would prefer to book a repo on an EONIA basis usually book it on call instead of booking an open trade. This would give the option for either party to close the trade within the agreed time period. It should be noted that the repo rate in the case of a callable repo would be the same as the rate on an open repo transaction with all other parameters kept constant.
Substitutable repos allow either counterparty to substitute the securities that have been repo'ed for the duration of the repo term. The frequency with which substitution is permitted can be predetermined. This is also known as ROS24 or ROS48. The general collateral, US Treasury and Agency repo markets trade predominantly on ROS.
Duration
The duration of a repo may vary from transaction to transaction.
- An open repo has an indefinite maturity and termination occurs whenever one of the counterparties decides to close or in the event of a re-price
- A term repo allows the counterparties to agree beforehand on both a settlement date and a maturity date
- Overnight transactions settle on the same day as the trade date
- Tom/next transactions settle on the business day following the trade date
- Spot/next repos require two business days for settlement
See ROS and ROE for term repo variations.
Accrued interest
Calculating Accrued Interest |
|---|
| Accrued Interest = x / y times Interest Payment |
| Example: A 10% coupon will pay an annual interest of £100 or a semi-annual interest of £50 per £1000 face |
| y = 360/2 = 180 |
| x = 100 |
| Therefore, accrued interest = 100/180 * 50 = £27.78 |
The accrued interest is interest that is earned on a coupon since the last coupon date.
DVP (Delivery-vs-payment)
DVP means the simultaneous delivery of securities against payment of funds within a securities settlement system. The settlement system (eg CREST uses this mechanism) delivers collateral securities, meeting the pre-determined criteria to the value of the cash (plus a margin) from the account of the cash borrower to the account of the cash lender and reverses the transaction the following morning.
Daylight Exposure
This is the period during the day when one party to a trade has a temporary credit exposure to the other due to one party having settled before the other. It would normally mean that the loan had settled but the delivery of collateral would settle at a later time (although there would also be exposure if settlement happened in reverse). The period extends from the point of settlement of the first side of the trade to the time of settlement of the other. It occurs because the two sides of the trade are not linked in many settlement systems or settlement of loan and collateral take place in different systems, possibly in different time zones.
Example: Daylight exposure will happen if a counterparty decides to get the settlement cash in US Dollars rather than in Australian Dollars in the case of ACGB - Australian Government bonds. Because the domestic settlement system cannot settle DVP against another currency, the cash will settle one day and the collateral will settle the next day in the domestic system.
