Risk On Repurchase Agreement

While conventional deposits are generally instruments that are sifted against credit risk, there are residual credit risks. Although this is essentially a guaranteed transaction, the seller may not buy back the securities sold on the due date. In other words, the pension seller does not fulfill his obligation. Therefore, the buyer can keep the warranty and liquidate the guarantee to recover the borrowed money. However, security may have lost value since the beginning of the operation, as security is subject to market movements. To reduce this risk, deposits are often over-insured and subject to a daily market margin (i.e., if the guarantee ends in value, a margin call may be triggered to ask the borrower to reserve additional securities). Conversely, if the value of the guarantee increases, there is a credit risk to the borrower, since the lender is not allowed to resell it. If this is considered a risk, the borrower can negotiate a subsecured repot. [6] Under the simple approach, the counterparty`s risk weighting is replaced by the risk weighting of the credit protection instrument that partially secures or secures the exposure. The risk of concentration for certain types of security; As an alternative to the SA-CCR for calculating the counterparty credit commission, banks may, subject to supervisory authorisation, use the internal model method defined in the CRE53. A decisive calculation in each repurchase agreement is the implied interest rate. If the interest rate is not favourable, a reannument agreement may not be the most effective way to access cash in the short term.

A formula that can be used to calculate the real interest rate is below: a number of guarantors and protection providers are recognized and the calculations of capital requirements are subject to an alternative approach. Only guarantees or guarantees provided by companies with a risk weight below that of the counterparty result in a reduction in the cost of capital of the guaranteed exposure, since the protected part of the counterparty is covered by the risk weighting of the guarantor or the protection provider, while the uncovered party retains the risk weighting of the underlying counterparty.

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