Short-Term Borrowing In Government Securities

When it comes to the field of short-term borrowing for dealers in government securities, there are a number of different options. One of these includes trading repos. Repo stands for repurchase agreement. This is when investors are sold government securities via a dealer, typically on an overnight basis, and then the following day they are purchased back at a slightly higher price. The minor difference in price is the implicit overnight interest rate. The purpose of repos is typically for raising short-term capital. 

When it comes to repos, the one selling the repo is usually borrowing. It is the other party that is lending. This is because the lender receives the implicit interest in the difference in prices. When you consider this, repos are clearly a form of short-term borrowing. Their tenor is typically overnight or 48 hours at the most. An investment management company will be able to help you explore other forms of short-term borrowing if you are interested. This bfinance fee study provides some interesting information on investment management and the different fees that are involved, and so it is definitely worth taking a look at it. 

What is a global master repurchase agreement? Well, firstly this is something you may have seen more commonly written as the abbreviation; GMRA. This agreement has been published by the International Capital Market Association (ICMA) and it is a model written legal agreement that has essentially been constructed for transacting repos between parties. The GMRA is for both cross-border repos globally as well as domestic repo markets. In both instances it acts as the principal master agreement.

The global master repurchase agreement has been around for over 20 years now. It was first published back in 1992. However, three years later it was updated. The reason for this is because of the Baring Brothers crisis. This was an acute recession. Thus, the updated version was altered in order to accommodate the lessons that had been learnt because of this. The next update was in 2000. This was when the GMRA was edited in order to include lessons that had been learnt from the financial crises in both Asia and Russia. The most recent updated occurred two years ago in 2011. This coincided with the financial crisis of 2007, however this was not the reasoning behind the modifications. The 2011 version actually arose out of a want to harmonise the GRMA more closely with various different master agreements. This encompassed the likes of the ISDA Master Agreement and the Global Master Securities Lending Agreement (GMSLA). In  addition to this, another reason for the updated was because there was a necessity to reflect the changes that had occurred in general legal developments and market practice since the last edit in 2000.

So, now you have a brief history regarding the updates in the GRMA since its introduction in 1992, let’s actually look further into what the global master repurchase agreement consists of. Firstly, it is pivotal to state that this is a pre-printed Master Agreement. What is contained inside is as follows;

Typical provisions that are standard to the market and do not require additional negotiation by parties involved.

• Annex I: Listing choices that must be made by the parties whilst presenting somewhere to record extra terms and conditions if the parties want to modify the Master Agreement to reflect the special terms and conditions of the corporate relationship between the parties.
• Annex II: Specific commercial terms of every transaction are recorded in confirmations.

Finally, in order for businesses to guarantee that the global master repurchase agreement remains effective there is the commission of legal opinions on an annual basis by the ICMA. These opinions are based on the likes of its transfer of title provisions and the enforceability of the entire agreement.

Hopefully you will now have a much clearer picture regarding what a GMRA actually is. It is essential to know about this agreement if you are involved in any sort of transaction of repos. After all, this is the Master Agreement and therefore the imperativeness of it simply cannot be stressed enough. Also, you know how important it is for documents as significant as these to be constructed correctly as well. 

Image by Niek Verlaan from Pixabay

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