a

B a rc l ays Capital
Repo and Securities Lending
Product Guide
Table of Contents
Introduction 1
Brief History of the Repo and Securities Lending Market 2
Repurchase Agreements 3-4
A Repo Transaction in Detail 5
A Reverse Repo Transaction in Detail 6
Sell and Buy-Backs 7
A Sell/Buy-Back Transaction in Detail 8
A Buy/Sell Transaction in Detail 9
Securities Lending 10
Securities Lending, Transaction in Detail 11-13
Guidelines for Investing in Repo 14
Collateral Types 15
Tri-Party Repo 16
How Does a Tri-Party Repo Work? 17-18
Summary of Product Features 19
Glossary 20-24
Contacts 25
Introduction
Barclays Capital has positioned itself to offer the products of International Repo and Securities
Lending. With emphasis on portfolio performance and yield enhancement, the International
Repo and Securities Lending markets provide attractive options to both the cash investor and
the security owner. This exceptional money market instrument allows cash investors to better
manage their cash. Barclays Capital is a dedicated market professional in this forum and is
committed to the continued use and development of this global product. Securities holders
are able to take advantage of their current portfolio holdings and through lending, enhance
their portfolios profitability.
The Barclays Group is one of the leading global financial institutions and one of the premier
banks in the United Kingdom. This institution is over 300 years old and continues today its
traditions of quality, service, financial innovation and financial stability. Barclays Capital is the
investment banking division of Barclays Group, with offices in Europe, the Americas and Asia.
The Barclays Capital Repo team includes desk trading in 12 currencies and the emerging
markets with offices located in London, Tokyo, Paris and New York ensuring full coverage of
the Global Repo and Securities Lending markets.
01
Brief History of the Repo and Securities
Lending Market
The Securities Lending and Repurchase Agreement (Repo) Market developed in the US to
better meet domestic trading obligations and to reduce the cost of failed trades. During the
1980s and early 1990s, Repo made a natural progression toward the European continent as
well as in the Pacific Rim and on 2 January 1996, the United Kingdom began trading Gilt Repo.
It continues to be an ever increasing global market with growth in Emerging Markets, such as
Latin America, South America, Mexico, Russia, Eastern Europe and Southeast Asia.
Clearstream and Euroclear, two major international clearing agencies, were the first in Europe
to begin a Securities Lending program to facilitate the receipt and delivery of securities
g l o ba l l y. Their Securities Lending pro g rams we re aimed at reducing existing marke t
inefficiencies and the number of failed trades. As both domestic and international derivative
products (specifically futures and options) began to take hold, broker/dealers sold short with
more regularity. The Group of 30 highlighted securities borrowing and lending as a vehicle that
would, in the coming years, lead to increased market liquidity. As a result, the demand to
borrow securities has expanded and Repo and Securities Lending as a means of reducing
related costs has become a major product focus.
In order to reduce these costs and increase accessibility to supply, international
brokers/dealers began to seek out international investors directly. The International Repo and
Securities Lending markets have attracted numerous participants including central banks,
corporate cash managers, banks, pension funds, insurance companies, mutual funds and
arbitrators.
Today the Global Repo and Securities Lending markets provide users with a wide variety of
products in all major currencies (US $, Euro, Japanese Yen as well as sterling, Skandanavia
(list), Australian & New Zealand $ and most emerging markets).
02
Repurchase Agreements
Repurchase Agreements, commonly referred to as Repos, are money market transactions in
which one party sells securities to another while agreeing to repurchase those securities at a
forward date. These transactions possess several characteristics associated with a secured
loan, with the lender of money receiving securities as collateral to protect against borrower
default. In fact, Repos are frequently viewed by some market participants as securities sales
with subsequent re p u rchases and secured loans by others. Howe ve r, a distinguishing
characteristic of a Repo is that the title of the securities distinctly passes from the buyer to the
seller. Parties providing money are referred to as investors while parties providing securities
a re re fe r red to as sellers. The terms securities and c o l l a t e ral are genera l l y
interchangeable.
The terms Repurchase Agreement, Repo, Reverse Repo, and Resale are all used to
describe the same transaction. One firms Repo is another firms Reverse Repo; both are the
same transaction viewed from two different perspectives. It is common street practice for
both parties to view the transaction from the dealers perspective. A dealer looking to borrow
money is transacting a Repo, while a dealer looking to obtain securities is executing a Reverse
Repo. Accordingly, when a client delivers money to a dealer, the transaction is often termed a
Repo by both parties.
Points to Summarize
One firms Repo is another firms Reverse Repo
Dealer borrowing money is Transacting Repo
Dealer obtaining securities is Transacting a Reverse Repo
Street convention is for both parties to view trades from the dealers perspective
Examples in this book will refer to all transactions from the dealers perspective.
The Advantages of Repo
There are many ways that Repo can enhance the portfolio profitability and enable greater
market efficiency. Listed below are a few advantages to customers and dealers.
For the Customer
Repo (cash investors)
Completely flexible regarding term
Invest short term cash in a fully collateralized vehicle
Competitively yielding money market investment
For the dealer/broker
Repo is used to:
Finance long positions
Reduce funding costs
Enhance trading efficiency
Facilitate matched-book and cash trading
03
Barclays Capital specifically tailors Repo transactions as money market instruments for various
customers in this market. These customers usually comprise two groups: cash investors and
the security holders.
Cash investors who find themselves long of cash can utilize Repos as a collateralized
investment for a short period of time. Since this market has become more international in
scope, investments may be made in all major currencies and transactions can be specifically
tailored to customers needs. Security holders are able to take advantage of their current
portfolio holdings and thus enhance their portfolios profitability.
The following describes the types of products offered in Repo. Barclays Capital makes markets
in all the products discussed.
04
05
Repo Transaction in Detail
Barclays Capital sells securities versus a transfer of cash from the investing customer with a
simultaneous agreement to repurchase the same securities at a future date. The securities are
valued at the current market price plus all accrued interest to settlement date. At the
termination of the Repo, the securities are repurchased at the original price value (market
price + accrued interest), plus Repo interest. The price of the security remains the same as the
term of the trade. All coupon interest which accrues during the term of the transaction is paid
to the original seller of the securities.
Example
A customer has $139,695,652 to invest for 14 days from 1 Nov 2002 to 15 Nov 2002. Barclays
Capital can provide the UST Bond 8% 11/15/21 as collateral and quotes a Repo rate of 1.58%;
hence the customer will earn Repo interest of $85,835.22.
Calculation
Current Market Price 136
Accrued interest as of 1 Nov 2002 .36956522
All in Price 139.6956522
Nominal Bonds pr ovided by Barcla ys Capital
Investment Amount /(all in price/100) = 139,695,652/(139.6956522/100) = 100,000,000
Bonds
Repo interest to be paid to the customer:
139,695,652 * (14 days/360 days) * 1.58% = $85,835.22
Flow
1 Nov 2002
15 Nov 2002
A Reverse Repo Transaction in Detail
Barclays Capital purchases securities versus a transfer of cash with a simultaneous agreement
to resell the same securities at a future date. The securities are valued at the current market
price plus all accrued interest to date. At the termination of the Reverse Repo, the securities
are resold at the original principal value (market price + accrued interest, plus Repo interest).
The price of the security remains the same for the term of the trade. All coupon interest which
accrues during the term of the transaction is paid to the original seller of the securities.
Example
A customer has 125,000,000 of US Treasury 5 year note, 4 3/8 15 May 2007 to loan to the next
refunding date which is 15 August 2002 hence the Repo trade will have a duration of 72 days
(4 June 2002 to 15 August 2002). Barclays Capital quotes a Reverse Repo rate of 1.20%.
Calculation
Current Market Price 100.26228
Accrued Interest as of 4 June 2002 0.23772000
All in Price* 100.50000
*When quoting a dollar price in the Repo market it will always be quoted as an all in price which is the
current market price of the bond + accrued interest up to and including that date.
Cash provided by Barclays Capital =
Nominal amount * (all in price)/100) = 125 million bonds * 100.50000/100 =
USD 125,625,000
Flow
4 June 2002
15 August 2002
06
Sell and Buy-Backs (Dollar Roll)
Some market participants are precluded from entering Repurchase Arrangements. This may
be due to regulatory and tax restrictions, individual corporate bylaws, an accounting system
better suited to booking spot and forward trades, or the inability to administer mark to
markets and/or substitutions of collateral. Since our business is customer driven, Barclays
Capital will accommodate these accounts by entering into separate Sale and Buy trades in
certain circumstances. With the introduction of the Capital Adequacy Directive in Europe, Sell
and Buy-Back trades with European customers are moving more towards transactions under
a legally binding agreement and we have sample boiler plate documentation that we can
make available to clients. The Bank of England and the US Federal Reserve Bank have stated
the necessity of trading with Repo Agreements when dealing in financing and transacting in
the debt of those markets. Buy Sell-Backs are permitted in those markets but require
appropriate documentation be put in place to govern the transaction. It is Barclays policy to
transact Buy-Sell Back transactions only after appropriate documentation has been executed.
Sell/Buy-Backs differ from Repo in the following ways:
Transactions are actually two separate trades without characteristics which point to a
secured loan.
Both the Sale and the Buy trades are entered into at the same time, i.e., spot and forward
using an investment rate to derive the forward price.
Excess margin is generally not provided by the cash borrower.
The lender of cash receives title to the securities while also becoming the owner (the
concept of beneficial ownership retained by the cash borrower does not apply).
Borrower of cash does not have the right to substitute collateral unless explicit in original
terms of trade.
Sales and repurchase prices differ. Sale price is the market price, and the buy price is the
original market price plus or minus the difference between the securities coupon rate and
the agreed upon financing rate.
Master repurchase agreements are not executed unless one is selecting to engage in
documented Sell/Buy-Backs.
Accrued interest and coupon payments belong to the lender of cash (holder of title),
although the Forward Price would adjust for any payments made during the term of the
trade.
Buy/Sell-Backs and Sell/Buy-Backs trades in the US are commonly referred to as Dollar
Rolls.
Exact figures on the percentage of financing trades executed in this fashion are not available,
but the market is estimated to be a small percentage of the US domestic financing market. It
is estimated, howe ve r, that nearly one third of the off s h o re international financing
transactions are executed on Sell and Buy-Back basis. This has diminished over the last few
years due to the growing acceptance of the Global Master Repo Agreement (GMRA).
07
A Sell/Buy Back Transaction in Detail
Barclays Capital sells for a specific period of time with a simultaneous agreement to buy back
the same securities at a future date for a price which is calculated to reflect the implied rate of
return (Repo Rate). The securities are valued at the current market price plus accrued interest
to settlement date. At the termination of the Sell/Buy-Back transaction, the securities are
bought back by Barclays Capital at the predetermined price.
Example
A customer has EUR 50,737,985 to invest from 15 May 2002 to 17 June 2002. Barclays Capital
will provide an Italian Government Bond BTPS 4% due 15 July 2004 as collateral and quotes a
Repo rate of 3.25%; hence the customer will earn Repo interest of EUR 151,156.91.
Calculation
Pricing the Sell transaction for 15 May 2002
Current clean market price 100.15
Accrued interest as of 15 May 2002 1.32597
All in price* 101.47597
Nominal bonds provided by Barclays Capital = investment amount/(all in price)/100) =
50,737,985/(101.47597/100) = 50,000,000.
Calculating the sell price
All in price = (investment amount/nominal amount) * 100 = 50,737,985/50,000,000 * 100 =
101.47597
All in sell price = all in price accrued interest to 15 May 2002 = 101.47597 1.32597 = 100.15
Pricing the Buy-Back transaction for 17 June 2002
Financing interest to be paid to the customer = 50,737,985 * (33 days/360 days) * 3.25% =
DEM 151,156.91
All in price = (investment amount + Repo interest/nominal amount).
100 = 50,737,985 + 151,156.91/50,000,000*100 = EUR 101.7782838
Minus accrued interest as of 17 June 2002 1.6906100
Buy-Back Price Clean 100.087674
Thus Barclays Capital buys back 50,000,000 bonds at a clean price of 100.087674
* Prices used in Sell/Buy-Back transactions are quoted on a clean basis. In other words, this financing
transaction more closely mirrors the settlement of the bond in the cash market. So the bond will settle
with the cumulative Repo interest to date (mirroring the money settlement of a Repo). The real difference
in a Sell/Buy-Back is the calculation of the clean price on the Buy Back of the forward side of the trade.
Flow
15 May 2002
17 June 2002
08
09
A Buy/Sell-Back Transaction in Detail
Barclays Capital purchases securities for a specific period of time with a simultaneous
agreement to sell back the same securities at a future date for a price which is calculated to
reflect the implied rate of return (Financing Rate). The securities are valued at the current
market price plus accrued interest to settlement date similar to the way a bond would settle
in the cash market. At the termination of the Buy/Sell Back, the securities are sold back to the
customer at the pre-determined price which is calculated using the current price and
financing rate.
Example
A customer has a US Agency Security (FHLMC 6.25% 03/12) to go for two months starting 4
June 2002 and ending 5 August 2002. Barclays Capital quotes a Financing Rate of 1.75%.
Calculation
Pricing the Buy Transaction for 4 June 2002
Current market price 101.436468
Accrued interest as of 4 June 2002 1.5451388
Price used to calculate total consideration 102.981607
Cash provided by Barclays Capital = nominal amount * (all in price/100) =
100,000,000 Bonds * (102.981607/100) = USD 102,981,606.89
Pricing the Sell-Back Transaction for 5 August 2002
Financing interest to be paid by the customer = 102,981,606.89
All in price = all in buy price + Repo interest = 103.291982
102,981,606.89+310,375.12=103,291,982.01/100,000,000*100=103.291982
Minus accrued interest as of 8 August 2002 2.604167
Sell-Back Price 100.687815
Thus, Barclays Capital sells back 100 million bonds at a trade price of 100.687815
Flow
4 June 2002
8 August 2002
Securities Lending
Background
Whereas Repo are executed exclusively versus cash, the loan of securities can be transacted
versus three types of collateral: cash, securities or letters of credit. The borrowed securities are
valued at the current market price plus all accrued interest to date (where applicable). At the
termination of the loan, these securities are returned at the original principal value plus a
securities fee (for non-cash collateral) or rebate (for cash collateral). The lender of the
securities retains incidence of ownership, receives all coupon interest on dividends paid and
benefits from any corporate actions taken during the term of the loan.
Cash is by far the most common form of collateral, accounting for about 95% of outstanding
loans. In securities loan versus cash the dealer puts up cash and may give reverse margin.
Dealers provide reverse margin as an enticement to institutional investors to lend issues. They
receive a rebate on these funds, meaning that the securities lender/agent pays the dealer a
stated return on these funds.
The advantages of Securities Lending for the customer
Securities Lending (security holders)
Enhance yield.
Earn incremental income.
Maximize portfolio returns.
The advantages of Securities Lending for the broker/dealer s
Securities Lending
Cover short positions.
Facilitate matched-book and cash trading.
Reduce fails.
Increase operational efficiency.
10
11
Securities Lending Transactions in Detail
Generally, there are three types of Securities Lending Transactions:
1. Borrow versus Cash Term (Bonds)
2. Borrow versus Cash Open Basis (Bonds)
3. Borrow versus Pledge of Securities (Bonds)
The following examples help describe the economics of each
Example 1
Borrow versus cash Term (Bonds)
Barclays Capital wants to borrow 11,000,000 Ford 6% 02/05 denominated in Euro 22 July
2002 to 22 Aug 2002. Barclays Capital will accept a rebate rate of 2.25% and provide Euro cash
as collateral.
Calculation
Current Market Price 102.402740
Accrued interest as of 22 July 2002 2.59726
All in Borrow Price 105.00
Rebate interest to be paid by the customer =
11,550,000 * (31 days/360 days) * 2.25% = EUR 22,378
Flow
22 July 2002
22 August 2002
Example 2
Borrow versus cash Open Basis (Bonds)
Suppose Barclays Capital is short the current US Treasury 5 year note, and must borrow the
issue to meet delivery obligations. With general collateral government Repo trading at 1.75%,
a Security Lending agent bank on behalf of an underlying institutional investor offers 50
million of the 10 year note, which in this case is the US Treasury Note 4 3/8 05/07, to Barclays
Capital against cash collateral, with a rebate of 0.65% and an open maturity date. Through
a simultaneous delivery of cash for securities, the lending agent obtains cash, and
immediately invests the money in a government Tri-Party Repo on an open basis. The lending
agent would generate a 110 basis point spread on the trade, which it would share with the
institutional investor based on their lending agreement.
Since the trade was executed on an open basis, both parties may terminate the transaction the
next day, or renegotiate the terms. The next morning, demand is slightly less to borrow the
current long bond, so the lender/agent offers the issue at a rebate of 1.00. US government
general collateral is still trading overnight at a rate of 1.75% This negotiation continues on a
daily basis (agreeing on some days to leave unchanged) and is closed out by one of the
counterparties 12 days later as shown in the example below.
The lender/agent can lock in the spread between GC and the special rate reinvesting in
delivered Repo or they can alternatively opt for Tri-Party Repo collateralized with other types
of collateral, such as TIPS/Agencies or Corporates at a 3 and 8 basis point yield enhancement
over US Treasury or sovereign debt security Repo.
Calculation
Current market price as of August 16 100.727678
Accrued interest as of August 16 1.1056386
All in Borrow Price 101.8333166
Rebate interest calculation
16-19 August 2002 Agreed rebate rate (weekend) .65%
19 August 2002 Negotiated new rate 1.00%
20 August 2002 Negotiated new rate .75%
24 August 2002 Negotiates new rate .80%
28 August 2002 Trade closed out 9.15%
Average Rebate Rate (9.15%/12 Days) .7625
Rebate interest to be paid by the customer =
50,916,658.30* (12 days/360 days) * 76.25 bps (.007625) = USD 12,941.32
* Assumes 100% collateralization no haircut
Flow
16 August 2002
28 August 2002
12
13
Example 3
Borrow versus Pledge of Securities (Bonds)
Barclays Capital wants to borrow 100mm German DBR 4 3/4 4 September 2008 and will
pledge the Italian Government Bond BTPS 4 1/2 May 2009. Barclays Capital is willing to pay a
borrow fee of 30 basis points for two weeks. For ease of settlement, both the borrow and the
pledge will settle versus cash but the cash amount will be identical.
Calculation of the Collateral Value Required
Current market price of the DBR 4 3/4 4 Sep 2008 100.67
Accrued interest as of the 0.6246575
All in Borrow Price 101.2946575
Value of the collateral required = Value of the bonds borrowed
(100,000,000 * 101.2946575/100 = 101,294,657.50)
Calculation of the Nominal Amount of the Pledge
Current market price BTPS 4 1/2 May 2009 99.95
Accrued interest as of 1.36957
All in Pledge Price 101.31957
Nominal bonds required = value of the bonds borrowed/(pledge price/100) =
101,294,657.50/(101.31957/100)=99,975.412. The nominal amount for the pledge should be
rounded up to the nearest 10,000, hence the nominal amount would be 99,980.000
Calculation of the fee payment
Fees payable = trade value amount of bonds borrowed * (# days borrowed/360 days) * borrow
fee = 100 million * (14 days/360 days) * .003 = EUR 11,666.67
Barclays Capital will return the pledged securities versus, the original amount + fees
(101,294,657.50+11,666.67=101,306,323.17)
Flow
21 August 2002
4 September 2002
Guidelines for Investing in Repo
The economic benefits of financing transactions can be substantial for the lenders of cash.
The risk/reward analysis is greatly in favor of the investor when the business is done prudently.
Here are a few general suggestions to consider when entering this market:
1. Know your counterparty
Evaluate customer credit worthiness to ensure a high degree of safety.
Only deal with reputable firms.
2. When possible, accept delivery of collateral
Transfer collateral to your custody account through a Tri-Party or DVP transaction.
If absolutely necessary, take physical possession of securities.
Only execute segregation Repo with well capitalized, reputable dealers.
3. Maintain proper margin
Maintain proper margin by marking to market collateral when necessary.
Enter into Tr i - Party agreements when possible to provide for facilitated marg i n
maintenance.
4. Obtain proper documentation
Execute a master repurchase agreement with all counterparties where possible (this is
absolutely necessary for the trading in the US, UK, and all Emerging Markets Repo).
Receive trade confirmations and telexes on a timely basis.
If transacting Sale/Buy-Back arrangements (spot and forward trades), obtain timely
confirmation of both sides of the trade at its inception.
5. Ensure accurate pricing of collateral
Always use full-accrual pricing (which includes accrued interest).
Use current market prices in all transactions.
When possible, independently confirm prices to ensure proper collateralization.
14
Collateral Types
The following is a list of countries and collateral types that are traded in Repo. We have not
listed every country and are not limited to dealing in only these currencies.
15
Australia
Australian Government and semi-government bonds
Canada
Government Guaranteed bonds and bills only
EEC
All EC sovereign debt excluding Greece and Portugal, Supranational to include EIB, IBRD,
EEC,EBRD, Eurofima Council of Europe
Emerging Market Repo
Government and Corporate Debt
Euro
All 12 Euro Countries Bills, Notes & Bonds
Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the
Netherlands, Portugal, Spain
Japan
Clean JGB only, Euroyen
New Zealand
New Zealand Government Bonds
US
T-Bills, Notes, Bonds, Strips, Agencies, GNMA, Remics, AA Pass Throughs
UK
Gilts, Eurosterling
Corporate Bonds All Currencies
Tri-Party Repo
What is Tri-Party Repo? A Tri-Party Repo puts a dealer, cash lender and third party custodian
bank together to enter into a Tri-Party arrangement in which the custodian bank acts as
intermediary in the Repo transaction between the cash investor and Barclays Capital. These
Repo are governed by a separate legal agreement executed by all three parties. This agreement
outlines the responsibilities of each party and the procedures for the day-to-day transactions.
Procedures for Tri-Party Repo
A cash investor shops around the market looking for the competitive Repo Rate for their
Tri-Party investment.
The rate on these third party Repo investments will be dependent on the collateral the
investor is willing to accept. eg. A counterpart willing to take governments only may
receive a quote of Fed Funds Flat on an over night investment. However, if the collateral
acceptable is expanded to include TIPS, Agencies, and Corporates. They could see a return
of Fed Funds + 5-7 basis points.
Custodian receives money from the lender and securities from the dealer. The bank then
credits the dealers cash account while simultaneously moving collateral to the cash
lenders custody account.
Collateral actually moves from the dealers clearing account to the cash lenders custody
account within the bank. The cash lender actually possesses collateral in its custody
account at the custodian bank.
Custodian usually prices collateral using an outside pricing service.
Almost always, the custodian bank in a Tr i - Party arrangement is the dealers clearing ba n k .
Since the collateral moves within the same bank, the dealer only pays an internal transfer
fee, not a more costly depository transfer fee.
Outstanding Tri-Party Repo collateral is marked to market by the bank to ensure proper
margining as collateral values fluctuate.
Cash lenders can ascertain which specific securities are being held in their custody
accounts later that day. Custodian bank also mails hard-copy confirmations detailing
collateral for all Tri-Party transactions.
Cash lenders receive slightly higher yields on Tri-Party versus DVP Repo due to the slightly
lower cost of settlement and flexibility or the trade for the dealer, as well as a reduced
likelihood of a day light overdraft in the dealers account when trades mature.
16
17
How Does a Tri-Party Repo Work?
A Tri- Party pictorial
Start Date
1. The Broker Dealer and customer trade.
2. The customer wires money to their account at the third party agent (custodian bank or
clearing house).
3. Barclays Capital instructs the agent to move securities from its account to the Tri-Party
customer collateral account.
4. The customer instructs the agent to move funds from its account to Barclays Capitals
account.
5. After the third party agent values the security and verifies that the collateral is within the
agreed parameters, the agent will then simultaneously move the securities into the
customers account and release the funds to Barclays Capital account.
6. The agent and Barclays Capital will send a collateral confirmation to the customer.
Advantages of Tri-Party Repo
Flexibility customers can choose the specific types of collateral acceptable to them,
define the margin required and outline the daily reporting requirements.
Security the third party custodian handles all aspects of collateral management,
including the daily mark to market function and any resulting margin calls. The custodian
always ensures that there is complete segregation of collateral into the investing
customers account.
Efficiency the operational flows become streamlined with regard to settlements and
cashflows.
Cost effe c t i veness the Tr i - Party arrangements result in the elimination of
delivery/receive transaction costs to the investing customer. Barclays Capital will incur the
costs of the customers accounts at the Tri-Party bank. This results in the overall reduction
of costs to the investing customers.
18
Summary of Product Features
19
GLOSSARY
Accounting Treatment
A trade executed for a fixed period of time. The counterparties agree to and fix the rebate rate,
quantity of securities and trade duration at the onset of the trades.
Agent
A party to a loan transaction that acts on behalf of a client. The Agent does not typically take
risk in a transaction.
All-in Price
Market price of a bond plus accrued interest.
Approved Borrower
A borrower that has been formally approved by the UK Inland Revenue to transact overseas
Securities Lending activity through the UK.
Basis Point
One one-hundredth of one percent (.0001 or .01%).
Bearer Securities
Securities that are not registered to any particular party on the books of the issuing company
and hence are payable to the party that is in possession of them.
Buy-in
The practice of a lender of securities entering the open market to buy securities to replace
those that have not been returned by a borrower. Strict market practice governs Buy-Ins.
Buy/Sell Sell/Buy
Types of bond transactions that in economic substance replicate Reverse Repo and Repo,
respectively. These transactions consist of a purchase (or sale) of a bond versus cash with a
forward commitment to Sell-Back (or Buy-Back) the securities. Used as an alternative to
Repo/Reverse-Repo. There is now a special annex to the standard Repo agreement for
Buy/Sell-Back trades. This annex provides for margining Buy/Sell-Back transactions.
Carry
Difference between interest return on securities held and financing costs. Negative carry: Net
cost incurred when cost of carry exceeds yield on securities which are being financed. Positive
carry: Net gain earned when cost of carry is less than yield on financed securities.
Collateral
Securities or cash delivered by a borrower to a lender to support a loan of securities or cash.
Custodian
An entity such as Euroclear, Cedel or Bank of New York that holds securities of any type for
investor, effects deliveries, and supplies appropriate Reporting.
Delivery
Securities are delivered physically to the counterpartys custodian bank. These are typically
done versus payment.
Distribution
Entitlements arising on securities that are loaned out eg dividends, interest and non-cash
distributions.
20
DVP
Delivery versus payment, or the simultaneous delivery of securities against the payment of
funds.
ERISA
The Employee Retirement Income Security Act, a US law governing private US pension plan
activity, introduced in 1974 and amended in 1981 to permit plans to lend securities in
accordance with specific guidelines.
Fail
The failure to delivery cash or collateral for settlement. In certain jurisdictions this may result
in heavy fines or license suspension.
General Collateral (GC)
Securities that are not special (see definition p. 26) in the market and that may be used,
typically, simply to collateralize cash borrowings. Also called stock collateral.
Global Master Repurchase
The market standard Repo document used by non-dollar Agreement (GMRA) Re p o
practitioners. The GMRA is based on the US PSA Master Repurchase Agreement, was
introduced in November 1992 and subsequently updated, and is endorsed by the PSA and
ISMA.
Haircut
Initial margin in a Repo transaction. Generally expressed as a percentage of the market price.
Hold-in-Custody (HIC)
Borrower of cash segregates collateral in a specific Repo internal account for the cash lender,
rather than delivering out collateral.
Initial Margin
The amount by which the market value of the collateral in a trade exceeds the amount of
underlying cash or securities lent.
ISMA
The International Securities Market Association is an organization of international bond
dealers and maintains offices in Zurich. ISMA is the industry group that sets standards of
business conduct in the fixed income securities market, advises regulators on market
practices and provides educational opportunities for industry participants.
Legal Documentation
Separate agreements exist for Repo Buy/Sell-Back and Securities Lending. Counterparties
should enter into one form of agreement or another in order to address issues regarding
d e fault, confirmation, definitions, processing, etc. Please contact the Barc l ays Capital
representative in your region to obtain the necessary documentation.
Manufactured Dividends
When securities that have been lent out pay a cash dividend, the borrower of the securities is
generally contractually obligated to pass on the distribution to the lender of the securities. The
payment pass through is known as a manufactured dividend.
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Margin Variation
Once the Repo or Securities Lending transaction has settled, the margin variation refers to the
band within which the value of the securities used as collateral may fluctuate before triggering
a margin call. Variation margin may be expressed in either percentage or absolute currency
terms. The GMRA states that all legitimate requests for variation margin must be honored.
Mark to Market
The act of revaluing the security collateral in a Repo Securities Lending transaction to current
market values. This may be done daily or at a suitable interval agreed upon by the parties to a
transaction.
Market Value
The value of securities or collateral as determined using the last (or latest available) sale price
on the principal exchange where the instrument was traded, or if not so traded using the most
recent bid and offered prices.
Matched/Mismatched Book
Refers to the interest rate arbitrage book that a Repo trader may run. By matching or
mismatching maturities, rates, currencies or margins, the Repo trade generates a P & L.
Open demand transactions
Repo and Securities Lending trades that can be closed out by either counterparty at anytime,
giving the sufficient amount of notice for standard settlement in that market.
Principal
A party to loan transaction that acts on its own behalf or substitutes its own risk for that of its
client when trading.
PSA
The Public Securities Association is a US-based industry organization of participants involved
in certain sectors of the bond market. The PSA established non-binding standards of business
conduct in the fixed income securities market and advises regulators and others on market
practices.
Rebate Rate
The interest rate paid on the cash side of a Securities Lending transaction. A rebate rate of
interest implies a fee for the loan of securities.
Recall
A request by a lender for the return of securities from a borrower.
Repo
Transaction whereby one party sells securities to another party and simultaneously agrees to
repurchase the securities at a future date at a fixed price. Used to generate funding or to
increase yield on an investors long securities positions.
Repo Rate
The interest rate paid on the cash side of a Repo/reverse transaction.
Repricing
Occurs when the market value of a security in a Repo or Securities Lending transaction
changes and the parties to the transaction agree to adjust the amount of securities or cash in
a transaction to the correct margin level.
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Return
Occurs when the borrower of securities returns them to the lender.
Reverse Repo
Transaction whereby one party purchases securities from another party and agrees to resell
the securities at a future date at a fixed price. Typically used when the party which is long cash
is providing funding to another counterparty or when a party needs to borrow a security in
order to cover a short position.
Roll
To renew a trade at its maturity.
Safekeeping
In Repo and Sell/Buy-Back transactions when a counterparty does not wish to take delivery,
securities can be moved into a segregated account at a Barclays Capital clearing agent. The
securities are held on the books and records of Barclays Capital on the customers behalf. Each
transaction is confirmed by telex or facsimile. Securities may be substituted daily and with
each substitution, a new telex or facsimile is generated.
Stock Borr ow and Loan Committee (SBLC)
A UK based committee of international lending market practitioners chaired by the Bank of
England and administered by the London Stock Exchange.
Settlement
Repo and Securities Lending are typically transacted on a two or three day forward basis.
Standard delivery instructions for the various currencies are used. Counterparties should
agree to the settlement instructions on each individual trade.
Specials
Securities that, for several reasons, may be sought after in the market by borrowers. Holders
of special securities will be able to earn incremental income on the securities by lending them
out via Repo, Sell/Buy or Securities Lending transactions.
Spot
Standard non-dollar Repo settlement, two business day forward.
Substitution
The ability of a lender of general collateral to recall it from the borrower and replace it with
other securities of the same value.
Term Transaction
A trade that goes on for a determined period of time.
Tri-Party Repo
Repo used for funding/investments purposes in which bonds and cash are delivered by the
trading counterparties to an independent custodian bank or clearing house (the Tri-Party
Custodian) that is responsible for ensuring the maintenance of adequate collateral value both
at the outset of a trade and over its term. The Tri-Party Custodian marks the collateral to
market daily and makes margin calls on either counterparty, as required. Tri-Party Repo
reduces the operations/systems barriers to participating in the Repo market.
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This publication has been prepared by Barclays Capital (Barclays Capital) - the investment
banking division of Barclays Bank PLC. This publication is provided to you for information
purposes only. Prices shown in this publication are indicative and Barclays Capital is not
offering to buy or sell or soliciting offers to buy or sell any financial instrument. The
information contained in this publication has been obtained from sources that Barclays Capital
believes are reliable but we do not represent or warrant that it is accurate or complete. The
views in this publication are those of Barclays Capital and are subject to change, and Barclays
Capital has no obligation to update its opinions or the information in this publication. Barclays
Capital and its affiliates and their respective officers, directors, partners and employees,
including persons involved in the preparation or issuance of this document, may from time to
time act as manager, co-manager or underwriter of a public offering or otherwise, in the
capacity of principal or agent, deal in, hold or act as market-makers or advisors, brokers or
commercial and/or investment bankers in relation to the securities or related derivatives
which are the subject of this publication.
Neither Barclays Capital, nor any affiliate, nor any of their respective officers, directors,
partners, or employees accepts any liability whatsoever for any direct or consequential loss
arising from any use of this publication or its contents. The securities discussed in this
publication may not be suitable for all investors. Barclays Capital recommends that investors
independently evaluate each issuer, security or instrument discussed in this publication, and
consult any independent advisors they believe necessary. The value of and income from any
investment may fluctuate from day to day as a result of changes in relevant economic markets
(including changes in market liquidity). The information in this publication is not intended to
predict actual results, which may differ substantially from those reflected.
This communication is being made available in the UK and Europe to persons who are
investment professionals as that term is defined in Article 19 of the Financial Services and
Markets Act 2000 (Financial Promotion Order) 2001. It is directed at persons who have
professional experience in matters relating to investments. The investments to which it relates
are available only to such persons and will be entered into only with such persons. Barclays
Capital - the investment banking division of Barclays Bank PLC, authorised and regulated by
the Financial Services Authority (FSA ) and member of the London Stock Exchange.
BARCLAYS CAPITAL INC. IS DISTRIBUTING THIS MATERIAL IN THE UNITED STATES AND, IN
C O N N E CTION THEREWITH, ACCEPTS RESPONSIBILITY FOR ITS CONTENTS. ANY U.S.
PERSON WISHING TO EFFECT A TRANSACTION IN ANY SECURITY DISCUSSED HEREIN
SHOULD DO SO ONLY BY CONTACTING A REPRESENTATIVE OF BARCLAYS CAPITAL INC. IN
THE U.S., 200 Park Avenue, New York, New York 10166.
Non-U.S. persons should contact and execute transactions through a Barclays Bank PLC
branch or affiliate in their home jurisdiction unless local regulations permit otherwise.
* Copyright Barclays Bank PLC (2002). All rights reserved. No part of this publication may be
reproduced in any manner without the prior written permission of Barclays Capital. Barclays
Bank PLC is registered in England No. 1026167. Registered office 54 Lombard Street, London
EC3P 3AH.
Additional information regarding this publication will be furnished upon request.
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