Template:M summ GMRA Purchase and Repurchase

Clause 2(ii) Price Differential

Used to calculate the Repurchase Price, so not to be sniffed at, however convoluted the drafting. The Price Differential applies the Pricing Rate to the Purchase Price and applies the day count fraction to generate a time value for your Transaction.

Clause 2(jj) Pricing Rate

This is the repo rate. You multiply the Purchase Price by this rate, apply the relevant day count, and the result — the Price Differential — is the uplift that the Buyer expects over the life of the Transaction. This is made flesh in the Repurchase Price, which is the original Purchase Price plus the Price Differential.

Clause 2(kk) Purchase Date

The day you expect to settle the initial flows (Securities out cash in) on a Transaction, which will usually be a standard settlement cycle after you traded it.

Clause 2(ll) Purchase Price

The initial Purchase Price will be agreed prior to trading so, absent a typo, this should not be a term that you spend a great deal of your time poring over. While it is meant to be, and for good order really should be, at market, seeing as the Seller retains economic ownership of the Purchased Securities at all times and the Buyer is not exposed to their price risk, it really doesn’t awfully matter what the Purchase Price is. The margining mechanic will factor it in. At the time of the SFTR there was much wailing and gnashing of legal eagle beaks at the question of when, and whether, and how quickly, and how accurately, the price of repos and stock loans should be reported. Seeing as they are not risk trades (the way cash equity trades or synthetic equity swaps are), it really doesn’t matter. As the junior eaglets of many inhouse functions cottoned on, the gnashery largely went away.

Clause 2(mm) Purchased Securities

Purchased Securities are the ones that you, you know, repo. Note the Seller can ask to substitute these with other securities under paragraph 8.

Clause 2(oo) Repurchase Date

In the ordinary run of things, a repurchase Transaction has a fixed term and the Repurchase Date will be agreed up front and set out in the Confirmation. The unusual case is the “demand” Transaction, where one or other party, or both, can set a Repurchase Date at any time, though it must always be at least a standard settlement cycle after the demand is issued, for fairly obvious practical reasons.

Clause 2(pp) Repurchase Price

So the price at which you buy the bonds back is the price at which you bought them (the Purchase Price), plus the time value of your trade. Thus, the Seller in a repurchase Transaction retains the price risk of the bonds. If she sells at 100, for a month, with a Pricing Rate of 10% — bear with me: these numbers are not meant to sound realistic but to accommodate the JC’s well-documented struggles with arithmetic — then the Repurchase Price at the end of that month will be 100 + (10 * 30/360) = 100.833.

The Seller must repurchase the bond for 10.833 regardless of the market price at which the bond is trading at the time. Thus the bond functions like collateral for a loan of cash, which must be repaid with interest. Should the bond move in value against the cash repayment obligation, the Margin Maintenance provisions kick in to allow the parties, as they wish, to call for margin.