Delivery vs. Payment (DVP) Repurchase agreements are financial transactions that involve the sale of a security and the subsequent repurchase of the same security. Hence the name “repurchase agreement” (or repo, for short).
DVP Repos are typically short-term transactions—usually overnight—but they can extend out as far as two years. DVP Repos enable broker/dealers, banks and other market participants to sell securities in order to obtain immediate funds for their own accounts or for the benefit of their clients. They likewise enable the buyers of the securities to earn short-term interest on their funds. In effect, the securities function as collateral for short-term loans.
FICC's Government Securities Division (GSD) matches and nets DVP repo transactions as part of its netting process with other government securities trading activity, including all buy/sell transactions and U.S. Treasury auction purchases. Since the Repurchase Agreements Service was introduced in 1995, it has rapidly outpaced all other products and accounts for the largest dollar volume of U.S. Government securities trades processed through FICC. Today, on average, FICC matches, nets, settles and risk manages repo transactions valued at more than $1.7 trillion a day, bringing substantial cost-reduction benefits to its netting members and reducing positions requiring delivery by as much as 75%.
As a secured form of financing, repos offer dealers and other market participants more favorable terms than traditional money market cash lending transactions. Reverse repurchase agreements are used by institutions to earn income on their excess cash reserves. When the securities are sold, the sellers simultaneously agree to repurchase the securities on a specified day at a given price, including interest calculated using a rate agreed upon at the time the sale takes place. The portion of the repo transaction when the security is sold is referred to as the “start” leg, while the subsequent repurchase is called the “close” leg. The borrower, and therefore the person providing the collateral, is called the “repo dealer”; the cash provider is called the “reverse dealer” or “lender.” Except for a forward start repo, the “start leg” of the typical repo will settle as a normal transaction outside of GSD. The “close leg” will be part of the netting process on the respective settlement date.
FICC’s GSD DVP Service Comparison Members can participate in the Repo Comparison Service, and GSD DVP Service Netting Members can participate in the Netting and Settlement Service for repos. Access to both services is also available to non-GSD members through GSD’s Executing Firm feature. It permits current GSD DVP Service Netting Members, when they function as “introducing members,” to submit trades on behalf of non-FICC members, such as institutions and correspondent firms.
To learn more, check the video on Repurchase Agreement Services below.