Adnan Adams Mohammed
Effective October 1, 2020, REPOS trading will be electronically transacted using a framework provided by the Global Master Re-purchase Agreement (GMRA) a globally recognized legal document
The much expected advancement will allow REPOS trading to be executed in real time. This follows the launch of the Guidelines for Re-purchase Agreements in Ghana, which is in line with Section 134 (5) of the Bank and Specialised Deposit Taking Institutions Act (Act 930), the Bank of Ghana indicated in a statement issued, last week.
All participating banks have been directed to execute a GMRA with each other by September 15, 2020. This will take place prior to the October 1, 2020, scheduled commencement of live trading scheduled. Repos are effective tools for effective monetary policy transmission and serve as a channel through which the central bank can act more swiftly as a lender of last resort during periods of market stress. Currently, repos and reverse repos in the domestic financial markets are already serving as effective instruments for the conduct of monetary policy through open market operations by the central bank and as sources of short-term liquidity for market participants.
“Repo counterparties may use the appropriate systems to facilitate their conduct of GMRA – based Repos. The buyer of a Repo Security shall mark-to-market using Bloomberg as a pricing source. Where Bloomberg does not price a Repo Security, the buyer and seller shall agree a price for this purpose,” the Bank said.
According to the Central Securities Depository (CSD), as at end May 2020, a total of GHC51.63 billion in repo transactions had been settled. Transactions between commercial banks amounted to GHC56.550 billion, whereas the transactions between BoG as well as SNNIT with commercial banks amounted to GHC725 million and GHC11.349 billion.
Real time trading in repos between banks will significantly improve the capacity of a bank facing short term liquidity challenges to ride through them without any inconveniences for its customers, as such a bank would simply issue repos for cash to other banks over a short, agreed tenor.
In the anticipation of the loss of value of the collateral security that may be experienced if it is liquidated following an event of default by a counterparty, the buyer shall apply an extra margin at the initiation of the Repo transaction which would serve as compensation.
In July, 2020, the central bank also announced that GMRA-based repos qualify as eligible financial contracts to which netting arrangements as stated under Section 134 of the Bank and Specialised Deposit Taking Institutions Act (Act 930) can be applied.
According to section 134 (4), “net termination value” means the net amount obtained after setting off the mutual obligations between the parties to an eligible financial contract in accordance with the provisions of that contract.
GMRA-based guidelines contain a key feature which allows the transfer of title of collateral securities from the seller to the buyer. The title transfer under GMRA reduces credit and liquidity risk, as it allows the buyer to make use of the collateral during the tenor of the transaction, but return the same or equivalent securities to the seller at maturity.
Some market analysts have indicated that ultimately, these dealings should boost secondary market trading and price discovery of bonds and offer a cheaper source of short-term funding at increased volumes. Repo transactions between banks fit in well with their agreed strategy of supporting each other with liquidity whenever the need arises so as to prevent the need for the BoG to intervene with regulatory actions that sometimes affect the entire industry in a systemic manner. Such transactions thus serve as a fixed tenor alternative to interbank lending which is usually done on the basis of call – which means placements by a bank can be called in any time the lending bank wishes, the timing of which may be inconvenient for the bank receiving the placement – and thus is more convenient for the borrowing bank than interbank lending on call.