REPO transactions are what? REPO transactions: how does it work?

Direct lending, in all its varieties, is not always profitable. In some cases, other methods of improving the financial condition will be more effective, one of which is REPO transactions. This is such a special system of buying and selling, in which the obligatory condition is set: the seller will redeem the previously sold goods, whatever they are. Unlike collateral, with such an approach for a short period, all use rights are transferred directly to the buyer (with a rare exception). Only when the reverse operation is carried out, the possibility of full use of the REPO object will return to the original owner. Such transactions have a long history, and, given the specifics of this approach, the legislation only relatively recently developed a more or less clear and adequate position on this issue.

History

For the first time, something similar to REPO transactions arose in 1917 in the United States of America. The reason was very high taxes raised in connection with the military actions. It became extremely difficult and very unprofitable to use pre-existing credit systems. There was a need to invent something new, more effective. REPO is an abbreviation of the English words repurchase agreement, which translates roughly as a "sales agreement". The first system was used by the Federal Reserve Fund, that is, a conditionally state organization. Initially, this was done in order to qualitatively and successfully ensure lending to the banking system. Gradually, the benefits of this approach became clear to the rest of the companies and firms. And until the Second World War and the Great Depression, such deals became more and more popular. Then the economic situation changed, and the need for such tools simply disappeared for about 30 years. Reop transactions became relevant only in 1950, and since then they are spreading around the world again, gaining popularity. In particular, it is computers, communications and everything connected with it that has become the next impetus for the further development of the financial instrument.

Objectives

Some believe that REPO deals are a variant of buying or selling a property. In fact, the main task of such an operation is short-term lending in exchange for property that has approximately the same value (both tangible and intangible). It should be noted that in many situations the price of the transaction object at the beginning of its commission is somewhat less than in the end. That is, for example, there is an action that costs 10,000 rubles. The company sells this security and gets 10 thousand for it. Since REPO provides for mandatory subsequent redemption, after some time it will be necessary to perform a reverse operation. But by the time of its implementation, it may turn out that now this action is already 15 thousand. As a result, the company will have to return not 10, but 15 thousand rubles. The interest of both sides is quite obvious. So, the borrower very quickly receives the required amount, and the creditor for a relatively short period of time receives a significant profit. Naturally, as in any other financial situations, risks are always possible, which in this case will be higher than in more stable and understandable operations with lending. But the income is worth it.

Repurchase Object

The REPO deal with shares is the most common, profitable, simple and popular. Initially, it was implied that such transactions would be carried out exclusively with securities. Nevertheless, as the system developed, it became clear that by analogy it is possible to work with any other goods or products. The meaning of such operations is exactly the same, but the main feature is the more complicated registration of documents. For example, in order to re-register ownership in the context of repo transactions for a security, you will need to spend a small amount of time. But to implement the same operation with goods, products, equipment or real estate will have to deal specifically with the problem, which can require considerable effort and will take more time.

Features & Benefits

Briefly, what gets the borrower and the lender, was told above. But taking into account the fact that it is the mutually beneficial cooperation that is the basis for concluding any deal of direct REPO (as well as any other financial arrangements), this issue should be discussed in more detail. So, to the creditor (that is, the person who acquires the object) this approach is beneficial, because it becomes a full owner of the property. In the version of classical lending, ownership would still remain with the borrower, which in some cases is extremely unprofitable (especially when the benefits are greater, the shorter the period of sale of the goods). For example, if the creditor for some reason refused to buy out his former property, the second party can quickly and simply, as a full owner, sell the goods and get their profit. It will not be necessary to wait, arrange a trial in court, resort to bankruptcy procedures and so on. It should be noted that for the very fact of the transaction, only the value of the object of the contract is important, and not what the financial state at the moment is the borrower. That is, you can not at all be interested in the person to whom money is given, if it offers a liquid object and can confirm the right to own it. As a consequence, the procedure itself is greatly simplified and accelerated. This same feature is beneficial for the second borrower. No matter how bad his finances are, if there are liquid securities (or other similar goods), he can get money, and for this he does not have to spend much time or effort.

Shares and votes

There is one more feature that is inherent only in an operation such as a repo transaction. An example can be given such: the company sells the shares, which it owns. The actual owner of the securities is the creditor, but he does not receive dividends - they are considered the property of the previous owner until the moment when he refuses to repurchase the repo object. At the same time, the votes given by the shares are already owned by the lender, which can be a problem in some situations. Many companies prefer to sign a power of attorney agreement simultaneously with the transaction, so as not to lose the right to vote. Naturally, all this depends on the mutual relations of both sides, the features of their work and many other factors.

Taxes

There is one more important and very interesting feature that distinguishes REPO deals. This is the payment of taxes. In particular, many of the options for such buying and selling operations, which relate to the emitted securities, are much more profitable than others. For example, with a normal transaction, you would have to pay a tax for the very fact of the operation. But in the case of REPO, an option is considered, in which payment is made solely for the difference between the initial price of a share (or other similar security) and its final value. This is much more profitable than with another system. It should be noted that this concerns not only securities, but also those types of transactions that have been completed successfully. That is, the shares were bought back, and not left in the property of the lender. Also it is necessary to take into account that the maximum period should not exceed 6 months.

Classification for tax accounting

One of the basic problems that arise when it is necessary to use this particular taxation system is the need to clearly classify the transaction and its object. That is, it is necessary to clearly understand whether a particular operation is a simple purchase or sale of a security, or it is a repo-type credit system. Actually, the requirements and conditions of such an operation were described above. The term is not more than 6 months, the object is the same, referring to the issued securities. Participants in the deal are only two, and they do not change, and so on. Only if the procedure meets all the requirements, it will be possible to provide a preferential taxation system. It should be noted that the law allows for a small extension, but not more than before the end of the current period. For example, if the deal ends on December 10, then you can extend it until the end of the month, but no more.

Repurchase agreements with securities

The Bank of Russia currently uses such types of transactions solely to provide liquidity. He acts only as a buyer who buys securities from credit institutions. No other parties are treated as market participants. In addition, it should be borne in mind that in order to take advantage of the opportunities mentioned above, credit institutions must necessarily meet the requirements set by the Central Bank. Otherwise, no one will work with them either. Accounting for repurchase transactions in banks implies three types of discounts - the lower, the initial or the upper level. It should be understood that at 100% of the initial discount, the share will not be accepted as collateral.

Mechanism and parameters

Repo transactions with the Bank of Russia are carried out in two ways. The first implies an auction, the second - a fixed cost. Weekly auction is held for the transfer of funds for 1 week. Separately, additional auctions can be conducted, already focused on loans for up to 6 days. Time intervals, assessment of the adequacy of applications, amounts and other factors of transactions are determined only by the Bank of Russia.

REPO transactions: accounting

Unlike the taxation system, where different features and properties are important, since this can significantly change the amount to be paid, in accounting all is much simpler. So, all such operations are displayed simply as the purchase or sale of an asset. There are no special features or other non-standard actions, therefore, following the standard scheme, simply reflect the movement of the object of the repo agreement in one direction, and then, as it returns, to the other.

Results

Proceeding from all the above, it can be concluded that REPO transactions are a fairly simple and understandable mechanism for lending. It has many advantages over conventional, more classical systems, but there are some drawbacks. One of them may be considered an increased risk, but most embarrassing is the need to transfer to full ownership of any assets. Only really large companies can afford to do this.