Collateral backed Loans

14. Where is the distinction between repos and security loans?

Where is the distinction between repos and stock loans? As part of a loan agreement for transferable securities such as a repos, one of the parties lends another the right to a transferable bond or portfolio of bonds for a certain amount of money against the right to hold collateral. Although the first is referred to as the "lender", it transfers substantially the rights of the other.

Similarly, the other counterparty is referred to as a "borrower" although it acquires the right to the instrument. Collateral in collateral can be either other assets or currency (securities collateral against collateral in the form of money is very similar to a repo). Borrowers pay the creditor a charge for the use of the collateral provided.

If, however, liquid funds are provided as collateral, the creditor is required to re-invest the liquid funds and repay an amount of the re-investment yield to the debtor. An important distinction between repurchase agreements and security lenders is that most repurchase agreements are for general collaterals (GCs) and are therefore prompted by the need to loan and loan money (see Q11 ), while security lenders are usually pushed by the need to loan security.

However, there is an intersection between security borrowing and the "specials" sector of the repos which is also fuelled by specific security demands (see issue 12). A further important distinction is that the repurchase agreement repurchase agreement markets predominantly use debt and other interest rate derivatives as collateral, while an important part of the security loan markets is equity.

Given that security borrowing assigns not only the right fulfilling title to shares but also the associated right to vote and capital measures, it has become a right of call for the borrower in the security borrowing markets for borrowed transferable securities whether bonds or shares, allowing the borrower to reclaim transferable assets if he exercises his right to vote or reacts to capital measures.

Conversely, Rebo does not allow a vendor to call back its security during the lifetime of a deal unless the party has expressly arranged a right of replacement at the point of sale. In Europe, the European repurchase agreement markets are served by the European Rebo and Collateral Council (ERCC) of the ICMA (International Capital Markets Association), which issues the Global Master Repurchase Agreement (GMRA), the most widely used standard agreement for cross-border repurchase agreements (see Q19).

In Europe, the security loan markets are served by the lenders of the most widely used standard agreement for global security loans, the Global Master Securities Leasing Agreement (GMSLA), published by the lenders of the European Union's leading financial institutions, the lenders of financial instruments and the ISLA.