Accounts Receivable Under Reverse Repurchase Agreements

Dubbed “repo 105” and “repo 108,” investment bank Lehman Brothers used Lehman Brothers as a creative accounting strategy to strengthen its profitability ratios for a few days during the reference season, mistakenly classifying rest as real sales. New York Attorney General Andrew Cuomo claimed the practice was fraudulent and took place under the supervision of audit firm Ernst & Young. E&Y has been the subject of accusations that the company allowed the practice of using repos to “secretly remove tens of billions of dollars worth of securities from Lehman`s balance sheet in order to give a false impression of Lehman`s liquidity and thus deceive the invested public.” [19] In addition to using repo as a financial instrument, “repo distributors make markets”. These traders were traditionally called “matched book repo-traders”. The concept of a match book exchange closely follows that of a broker who takes both parts of an active trade and essentially has no market risk, only credit risk. Elementary matched book traders engage in both repo and reverse repo in a short period of time and reap the benefits of the silver letter spread between the reverse repo rate and the repo rate. Currently, matched-book repo-traders use other profit strategies, such as.B. inconsistent maturities, collateral swaps, and liquidity management. When repo transactions are settled by the Federal Open Market Committee of the Federal Reserve as part of open market operations, repo transactions add reserves to the banking system and then withdraw them after a certain period of time; Reverse-rests first remove reserves and then add them again. This instrument can also be used to stabilize interest rates and the Federal Reserve has used it to adjust the federal funds rate to the target rate. [16] There are a number of differences between the two structures. A repo is technically a one-time transaction, while a sell/buy is a pair of transactions (a sale and a buy). The sale/redemption does not require specific legal documents, whereas a repo usually requires a framework contract between the buyer and the seller (usually the Global Master Repo Agreement (GMRA) ordered by SIFMA/ICMA).

For this reason, an increase in risk compared to repo is associated. In the event of default by the counterparty, the absence of an agreement may reduce the legal position on the recovery of collateral. Any coupon payment on the underlying security during the term of the sale/redemption is generally returned to the purchaser of the security by adjusting the cash paid at the end of the sale/redemption. In a repo, the voucher is immediately sent to the security seller. While conventional deposits are generally credit risk instruments, there are residual credit risks. Although it is essentially a secured transaction, the seller can no longer redeem the securities sold on the maturity date. In other words, the repo seller is no longer in default in his commitment. Therefore, the buyer can keep the guarantee and liquidate the guarantee to recover the money loaned.

However, the security may have lost its value since the beginning of the transaction, as the security is subject to market movements. In order to reduce this risk, deposits are often over-undersured and are subject to a daily market margin (i.e. if assets lose value, a margin call can be triggered to ask the borrower to publish additional securities). Conversely, when the value of the security increases, the borrower runs a credit risk, since the creditor is not allowed to resell them. If this is considered a risk, the borrower can negotiate a subsecured repo. [6] Reverse retirement transactions (RRPs) are the end of a repo transaction. These instruments are also called secured loans, buy/sell back loans and sell/buy back loans. An EIA is easily but clearly distinguishable from Buy/Sell Backs. Buy/sell-back agreements legally document each transaction separately and ensure clear separation for each transaction….