Using repos/reverse repos to meet funding needs

By: Bryan Sibert

In a repo transaction, the bank will receive money from the counterparty in exchange for securities as collateral against this "loan". When the repo matures, the counterparty will return the securities to the bank and the bank will return the cash to the counterparty along with interest that the bank paid to borrow this money. A reverse repo is the opposite of a repo. The bank will take in securities as collateral on a loan to the counterparty. At the end of the term of the reverse repo, the counterparty will give the cash and interest to the bank and the bank will return the securities to the counterparty.

The repo desk will take in securities that the bank then uses to make good delivery of securities that were sold by the trading department but were not owned by the bank. The bank may use repos and reverses simultaneously to run a matched book. In a matched book, the bank is borrowing funds at one rate and lending them at a higher rate to earn a spread. Both the borrowing side and the lending side are collateralized. Profits are the sole purpose of running a matched book.

SS&C''s Lightning product provides full functionality for tracking repo and reverse activity including keeping a detailed transaction history, managing interest payments, producing management and regulatory reports, and interfacing to general ledger and DDA systems. The Lightning Funding module also provides the means to manage the collateral that is tied to repo and reverse repo transactions. Features such as collateral substitutions, the collateral margin screen and the on-line collateral browser allow the repo traders to quickly view available and pledged collateral and adjust collateral based on the current market prices and haircut requirements. And Lightning allows for an automated sweeps process using the prior business day’s collateral.

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