US Master Repurchase Agreement: Definition and Key Features
In the world of finance, a repurchase agreement or repo is a type of short-term borrowing wherein a seller agrees to repurchase securities from a buyer at an agreed-upon price and date. The use of repos is prevalent in the money markets and allows banks and other financial institutions to obtain short-term funding by pledging securities as collateral. To standardize the terms and conditions of repos, the International Capital Market Association (ICMA) has developed several global master repurchase agreements or GMRA. For the US market, the Securities Industry and Financial Markets Association (SIFMA) has created the US Master Repurchase Agreement or MRA.
What is the US Master Repurchase Agreement?
The US Master Repurchase Agreement or MRA is a standardized contract used by banks, brokers, and other financial institutions to engage in repurchase transactions. The MRA outlines the legal and operational aspects of the repo, including the nature and quantity of the securities pledged as collateral, the interest rate or repo rate, the maturity or term of the repo, and the terms for default or termination.
The MRA is a bilateral agreement between a buyer and a seller, where the buyer provides cash to the seller in exchange for the securities, and the seller agrees to repurchase the securities at a later date, typically within one to thirty days. The repo rate is the interest rate that the seller pays to the buyer, and it reflects the cost of borrowing or lending cash and securities in the market. The repo rate is usually close to the prevailing market interest rate, such as the federal funds rate, and it may vary depending on the creditworthiness, liquidity, and supply and demand conditions of the parties.
What are the key features of the US Master Repurchase Agreement?
The US Master Repurchase Agreement has several key features that make it a popular and efficient instrument for short-term funding and investment. These include:
1. Standardization: The MRA provides a standardized framework for repos that reduces legal and operational risks, enhances transparency, and facilitates market liquidity and efficiency. The MRA is widely used in the US market, and its terms and conditions have been tested and refined over time.
2. Flexibility: The MRA allows parties to customize some aspects of the repo, such as the type and quality of the securities, the repo rate, and the term, within certain limits. This flexibility enables parties to tailor the repo to their specific needs and preferences, while still adhering to the general principles and standards of the MRA.
3. Collateralization: The MRA requires the seller to provide collateral in the form of securities, such as US Treasury bonds, agency securities, or mortgage-backed securities, that have high quality and liquidity. The collateral serves as a cushion against default by the seller and protects the buyer`s cash from credit risk. The MRA also provides rules for the valuation, substitution, and haircut of the collateral, to reflect the market and credit risk of the securities.
4. Netting: The MRA allows parties to net their repo transactions, meaning that they can offset their exposures and settle the net amounts of cash and securities. Netting reduces the settlement risk and operational costs of repos, and it can be done on a trade-by-trade or portfolio basis.
5. Termination and default: The MRA provides rules for the termination and default of repos, which may occur if the seller fails to repurchase the securities or if the collateral becomes inadequate or ineligible. The MRA sets out the procedures for notifying and resolving disputes, and it allows the buyer to sell or liquidate the collateral in the event of default.
Conclusion
The US Master Repurchase Agreement is a vital tool for short-term financing and investment in the US market. It provides a standardized and flexible framework for repos that reduces risks, enhances efficiency, and promotes liquidity. By pledging high-quality and liquid securities as collateral, parties can obtain cash or securities at competitive rates, depending on market conditions. As with any financial instrument, it is essential to understand the terms and risks of the MRA before entering into a repo transaction.