In the current low yield environment, investors are looking for opportunities to enhance yield by lending their assets on repurchasing agreements (known as repo). In this article, Amanda Brilliant and Rafy Kouyoumjian outline the benefits of repo.
Repo can also be used as an alternative and collateralised money market investment whose returns are correlated to the collateral quality, counterparty rating and correlation between the two.
Depending on risk appetite, the investment can range from very short term, i.e. overnight or open (where the trade stands until called by either party with an agreed recall period) to any maturity, generally out to 2 years, but trades can be structured on a longer term basis. The trades can be collateralised with high quality assets, such as government bonds, supranationals through to corporates, Emerging Markets or High Yield assets.
On the other hand, investors looking to raise secured funding may choose to participate in tailor made financing solutions. Trades can designed to suit a range of maturities and against most assets, with financing rates depending on the desired tenor and type of collateral available.
With the increased access to emerging markets, some investors are exploring repo opportunities beyond developed markets. While not as predictable and as mature as repo in the developed markets, these markets are offering further opportunities. However it is essential not to underestimate the challenges posed by these markets. Intricacies are to be found in the domestic settlement infrastructure for example as well as local regulations which can affect the economics of repo trades.
Recent financial regulations have also added to the complexity of the repo markets providing opportunities but also challenges that need to be considered.