While all hedge funds require financing, some perform their own clearing operations, while others hire a prime broker to perform administrative tasks. In today’s blog, we’ll discuss the three main administrative reports that prime brokers provide to their clients who are not self-clearing.
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Though there are several types of interest rate swaps (IRS), the most familiar type is known as fixed-for-floating. A notional amount of principle is used to calculate periodic fixed and floating interest payments. One of the counterparties receives fixed interest payments and pays out floating-rate interest to the other counterparty, who reciprocates by paying fixed and receiving floating. The floating rate can be pegged to three-month the U.S. Treasury bills, London Interbank Offer Rate (LIBOR), or any other well-established rate index. Continue reading “Termination of Interest Rate Swaps” »
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Last time we looked at the contractual and collateral rules pertaining to securities lending by prime brokers. We’ll next explore fees, dividends and defaults as they relate to securities lending.
Recall that a Securities Lending Agreement is the contract required before shares are loaned. The agreement states that in the event that cash collateral is pledged, the borrower is entitled to a rebate on the cash at such rates as the borrower and lender agree. In the event that non-cash collateral is pledged, the borrower agrees to pay a fee to the lender at rates agreed upon by the borrower and lender. The fees and rebates are computed daily based on each trades value. This is the equivalent to the quantity (or par value in the case of government securities) multiplied by the rate in basis points annualized usually on an actual/360 basis.
The agreement may state that the fees are due by the fifteenth of the following business month (though most pay within thirty days), while for repo trades, the fee in the form of interest is due upon termination, re-price, or partial return of the repo. Continue reading “Securities Lending, Part Two” »
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Prime brokers offer a variety of services to investors, from providing credit to clearing trades. One important service offered is known as Securities Lending. In Part One of this article, we’ll look at the contractual and collateral rules pertaining to Securities Lending.
As an investor or hedge fund, you may wish to borrow shares for a variety of reasons, such as shorting the stock or hedging a long position. An executed Securities Lending Agreement is the documentation required before shares are loaned. Continue reading “Securties Lending, Part One” »
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Repurchase agreements are contracts involving the simultaneous sale and future repurchase of an asset, most often Treasury securities. Typically, the seller buys back the asset at the same price at which it sold. On the buy-back date, the original seller pays the original buyer interest on the implicit loan created by the transaction. Interest due on a repo at maturity is at the rate for the stated maturity of the repo.
A reverse repo, or simple a reverse, is a contract in which a repo is structured so that a broker/dealer, a bank, or another party that normally uses the repo market to fund (finance) itself is cast in the role of securities purchaser and money lender Broker/dealers often cover shorts by reversing in securities.
A sell/buyback is essentially the same as a repo, except for the treatment of coupon interest. Coupon payments are not forwarded to the investor by the counterparty. Instead, the counterparty pays the investor repo interest on the coupon payment. When the sell/buyback terminates, the investor will receive its accrued coupon interest from the counterparty. A sell/buy back transaction also differs from a repo transaction in that the sales price for securities delivered differs from the purchase price paid when the securities are returned. The difference in the price of the sale and purchase transactions accounts for the amount of accrued coupon interest earned and the financing cost charged during the term of the loan.
A buy/sellback is similar to a reverse repo. Continue reading “Repurchase Agreements” »
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