Commentary

D9.1001 Repos―overview

Corporate tax
Corporate tax | Commentary

D9.1001 Repos―overview

Corporate tax | Commentary

Division D9.10     Sale and repurchase of securities—repos

For updates affecting this Division please see Part D0 Updates

Repos

D9.1001 Repos―overview

In a repo, one party sells an asset (usually fixed-income securities) to another party at one price and commits to repurchase the same or another part of the same asset from the second party at a different price at a future date or (in the case of an open repo) on demand. If the seller defaults during the life of the repo, the buyer (as the new owner) can sell the asset to a third party to offset his loss. The asset therefore acts as collateral and mitigates the credit risk that the buyer has on the seller. The difference between the price paid by the buyer at the start of a repo and the price received at the end is the return on the cash that is effectively being lent to the seller1.

The financial markets commonly make use of repos to facilitate orderly dealings in shares, bonds and government stocks and to provide credit support. A repo may be entered into because:

  1.  

    •     the borrower has need of cash but does not wish

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