Delivery and credit risk, Financial Management

When a borrower uses repo market for fund financing, he has to deliver the securities to the lender. One way to do this is to deliver the collateral to the lender or to the lender's clearing agent. At the end of the contract, the lender returns the collaterals to the borrower. This process, though simple and straightforward, the costs associated with delivering the collateral may turn to be expensive, particularly for a short-term repo. Instead of delivering the securities, the borrower, if the lender agrees, may hold the security in a segregated customer account. This transaction is called as Hold-In-Custody repo (HIC repo). Even this option is not free from risk. The borrower may use the collateral in another repo transaction. Despite the credit risk associated with HIC repo, it is used when the collateral is difficult to deliver, the transaction amount is very small and the borrower has good reputation. Another alternative to delivering securities is - the borrower can deliver the collateral to the lender's custodial account at the borrower's clearing bank. This process involves merely transfer of securities within the borrower's clearing bank. Suppose a dealer A enters into an overnight repo with X, A transfers the securities to the X's custodial account at A's clearing bank. Next day, the securities are transferred back to A. The dealer A can enter a new transaction with Y without redelivering the securities. The clearing bank establishes a custodial account for Y. this type of repo arrangement is known as tri-party repo.

Posted Date: 9/11/2012 1:44:19 AM | Location : United States







Related Discussions:- Delivery and credit risk, Assignment Help, Ask Question on Delivery and credit risk, Get Answer, Expert's Help, Delivery and credit risk Discussions

Write discussion on Delivery and credit risk
Your posts are moderated
Related Questions
Write the format to place the order. What are the risks involved in the delivery of products. Format of the order: ? Purchase order ? Acknowledgement form ? Material requisitio

Question 1 Sections 42 to 50 of the Act deal with provisions pertaining to welfare of workers. State a few welfare measures that you would suggest in factories. List the welfare m

FORMS OF DIVIDEND Cash Dividend Many Companies pay dividend in cash. Often cash dividend may be supplemented by a bonus issue (stock dividend).  When the company chooses

Under what circumstances would market to book value ratios be misleading?  Explain. The Market to Book ratio is helpful, however it is only a irregular approximation of how li

Irregular Variation As the name suggests, the movement of the variable is random in nature without consistency and therefore, highly unpredictable. Since this type of irregular

waht are the basic functions of profit & loss account

Question 1: i) Is there a stable and inverse link between unemployment and inflation? ii) The government announces that expansionary policies will be enacted in a view

What is the matching principle of working capital financing?  What are the benefits of following this principle? The matching principle is while short-term financing is used fo

State about the capital structure of financial risk Frequently the funds supplied to a firm by lenders will change its financial structure and charge for the funds would be bas

lease finance and its types