Repo

A repo is a transaction wherein securities are sold at a particular price by one party (repo seller) to the other (repo buyer) with a commitment on the repo seller's part to repurchase the equivalent securities from the repo buyer (and a corresponding commitment on the repo buyer's part to sell the equivalent securities back to the repo seller) on a certain date and at a certain price, both such date and price being fixed as part of the same transaction.

Repo in government securities are fully-assigned, with collateral securities identified at the initiation of the trade. Repo proceeds include accrued interests. Typically repos are conducted as 'classic repos' with both initial and variation margin applied on market values of collateral securities. Variation margin may be called when the fall in value of collateral securities exceeds a mutually agreed margin threshold. Collateral securities may also be replaced or substituted at any time upon mutual agreement, however this is rarely done in the market. Coupon income received during the term of the repo may be returned by the repo buyer to the repo seller via 'manufactured payment' or paid in cash on the date of coupon payment by the repo buyer to the repo seller. A popular treatment however is to conduct 'coupon reinvestment' whereupon the repo buyer retains the coupon payment and treats it like a partial early repayment of repo proceeds by the repo seller.

Repo may either be "cash-driven" or "securities-driven". In a cash-driven repo, the repo transaction is used to obtain cash funding. Securities used as collateral are not specific and usually consists of off-the-runs. For securities-driven repo, repo buyers are specifically seeking a particular identified security typically on-the-runs or benchmark securities mainly for the purpose of covering short-sale positions. Both types of repo transactions are transacted between market participants and the central bank via standard repo and benchmark repo auctions respectively.

A standard repo auction is basically cash-driven and conducted daily for the purpose of liquidity management. The underlying collateral (commonly known as general collateral), mostly off-the-run issues are specified in each auction. The lowest bidder in terms of repo rates will be allotted first until the auction amount is fully allotted. Shortest maturity and highest credit quality collateral are allocated first to lower repo rate bidders before longer-term and lower-credit ones.

Repo auctions are conducted by Bank Negara Malaysia to complement clean money market borrowing, as repo rates are generally traded lower by 2 to 3 basis points compared to an unsecured or 'clean' borrowing over the comparable maturity term. On occasion, Bank Negara Malaysia will also provide liquidity under its standing facility using standard repos, typically bilaterally with market participants that experience liquidity shortages at the end of the day.

Benchmark or 'specials' repos are securities-driven transaction offered by the central bank to effectively lend specific securities, which in turn are either used to cover short selling activities or potential settlement failures by day-end. Bank Negara Malaysia conducts benchmark repo auctions twice a week on Tuesdays and Thursdays at T+2 settlements. Securities-driven repo auctions are conducted separately for each security on offer. Interested market participants may also approach Bank Negara Malaysia directly via 'reverse enquiries' to request specific securities via bilateral repos, subject to availability. Due to the scarcity and high demand of MGS benchmarks, securities-driven repo rates are transacted below normal repo rates, typically at least 10 basis points spread below the equivalent average unsecured interbank money market rates.

Illustrative Example of a MGS repo transaction

Bank A entered into a 1-month (30 days) MGS repo agreement with Bank B on 5 July 2006 at a repo rate of 3.70% for a nominal amount of RM100 million of the 6.844% coupon MGS maturing on 1 October 2009. The details of the transaction are as follows, assuming no margin or haircut:

Settlement:
On 5 July 2006, Bank A passed to Bank B RM100 million in nominal value of the underlying MGS (1st leg proceed of RM108,736,448.09). On maturity of the transaction (4 August 2006), Bank A repurchased the MGS from Bank B at a 2nd leg proceed of RM109,067,126.06, which includes the repo interest.

Sell and Buy Back

Sell and Buy Back Agreement (SBBA) is an Islamic money market transaction entered by two parties in which an SBBA seller (Seller) sells Islamic assets to an SBBA buyer (Buyer) at an agreed price, and subsequently, both parties entered into a separate agreement in which the Buyer promises to sell back the said asset to the Seller at an agreed price.

WI Trading

In the Malaysian market, 'when-issued' trading or WI commences upon formal announcement of a Government securities primary issue. WI is traded on the yield basis regardless of new or reopened issue, up to 3 decimal places. WI trading continues until the tender results are announced to the market. The value date for settlement of WI trades must be on or after the Government securities issue date but the standard value date is 2 business days (value spot). Trading on a WI is aimed at facilitating the price discovery process.