Add Repurchase Agreement Initials with airSlate SignNow

Electronic signature repurchase agreement

hi this is David a banach turtle with a quick review of a repurchase agreement or what's called a repo transaction now it's just a secured loan so if we start here with the borrower also called the buyer and the repo or the one who's doing the repo then our borrower here is selling the collateral so this could be a bond to the lender the lender is also called the seller and the repo or the one who's doing the reverse repo so the borrower selling the collateral to the lender in exchange for cash so my simple example the collateral has a value of $100 here and so our borrowers borrowing $100 against this collateral and now here's the key thing our borrower is promising to repurchase or buy that collateral back in the near future as soon as tomorrow probably so if they're selling that a spot price here they're really locking in a forward price tomorrow and so if we skip forward one day this is tomorrow then our borrower here repurchases the collateral by paying the locked-in forward price and effectively paying an interest rate to the lender so it's a loan of cash a short-term overnight loan with the key feature being that our lender here it's secured by collateral so if our borrower defaults overnight can't come up with the funds then the lender at least has this collateral they can go off and sell the collateral and recover their funds and so you can see that the quality of the collateral is important to the lender as of the first half of 2007 the haircuts were pretty much a zero percent regardless of the type of quality whether or not it was a corporate bond or asset-backed security or even a collateralized debt obligation 0% haircut means if the value of this collateral is 100 then our lender is giving the borrower hundred dollars in cash now what happened roughly in August of 2007 and the second half of 2007 is the haircuts we pretty much spiked across the board and so for example for asset-backed securities quite common for the haircut to jump from 0% to 20% now the collateral value if it's still a hundred with a 20% haircut and we can think of this haircut as the initial margin required by the lender on a 20% haircut for a value of a hundred our lender is now only buying this bond really for $80 or lending $80 cash on a collateral value of 100 so you can see how that 20% is a haircut and that's because the lender is less sure that they can go out and sell this collateral $100 so they're charging the haircut but now our borrower as of the second half of 2007 which tended to be a bank instead of receiving a hundred on all of these short-term overnight funds is receiving $80 on the same collateral value to the borrower which tended to be a bank these short-term funds are liabilities on the balance sheet there are short-term funds that are financing the borrower's assets and now as the haircut goes up these directly reduce the short term funds on the bank's balance sheet this end up ended up requiring these banks to sell theirs assets which put further downward pressure on prices and this is what Gary Gorton is called a run on the shadow banking system that started here with lenders starting to become suddenly suspicious and wary of certain types of collateral that they were really worth what they thought they were worth or that anyone knew and so they increased the haircut so that's a summary of a repo a repurchase agreement repo transaction this is David Harper the Bionic turtle thanks for your time