OECD - Reverse Transactions based on OECD

 Reverse Transactions

[Mrt: There is no info about the date or who wrote this document. I pick those 4 pages which I find important]


What are reverse transactions?
All involve sale of an asset but original owner remains exposed to asset
A repo involves sale of securities at a specified price with a commitment to repurchase the same or similar securities at a fixed price on a specified future date or with an “open” maturity.
A repo is viewed from the perspective of the seller of securities (“cash taker”). The agreement is called a reverse repo when viewed from the perspective of the securities buyer (“cash provider”).

 
...
pg.4
Securities lending
...is the same as repo except no exchange of cash (terminology may differ)
Same legal change in ownership but with “lender” remaining exposed to market gains/losses.
Collateral usually provided but usually not available for resale by “lender” until/unless default by “borrower”
Securities “borrower” pays fee for the “loan”

pg.5
Gold swaps:
...similar to repos; gold swapped for foreign exchange, with commitment to return the gold at agreed price.
Market risk (of price loss/gain) remains with lending monetary authority
Volume of gold returned, plus accrued interest (rate of interest agreed at inception of swap)

pg.6
Gold loans/deposits:
...similar to securities lending: no cash involved but full ownership transferred, even though market risk remains with “lender”.
“Borrower” may record gold as foreign currency deposit liability on balance sheet
Volume of gold repayable.
Collateral (usually securities) provided by “borrower”. Not usually available to “lender/depositor” until/unless default
Fee payable by “borrower”

...

Gold swaps
used to provide cash taker with liquidity in situation where it is reluctant to sell gold holdings
Gold loans
provide liquidity to gold market; assist “borrower” (who may be intermediary or gold miner) to make delivery when short of gold
...

pg.14
Issues for consideration: securities lending
If treated in analogous manner to collateralized loan for repo
No transaction recorded
Same potential risk of double counting as for repo if/when security on-sold outright
Reflects market exposure of original owner
What does the fee represent?

pg.15
Issues for consideration: securities lending
If treated as transaction in underlying security
Transaction recorded so follows legal change of ownership
Possible need for creation of financial derivative
Contrary to market view; fee hard to explain
Avoids potential double count if/when on-sold
 
pg.16
Issues for consideration: gold swaps
If treated in analogous manner to collateralized loan for repo
Potential for “overstating” reserve assets
Demonetization not necessary if swapped with non-monetary authority; commodity gold for outright purchaser and “short” for on-seller
Consistent with payment of interest on foreign exchange received
View of central bankers and market exposure of original owner

pg.17
Issues for consideration: gold swaps
If treated as outright sale of gold:
Follows legal change of ownership
Possible need to create financial derivative
Avoids potential “overstatement” of reserve assets

Contrary to central bankers’ views and with market exposure of original owner

Interest payment difficult to explain/interpret

Demonetization necessary if swapped with non-monetary authority


pg.18
Issues for consideration: gold loans
If treated in analogous manner to collateralized loans for repos:
No transaction recorded by monetary authority
Possible deposit liability with no deposit asset
Consistent with payment of fee
No demonetization necessary if swapped with non-monetary authority
Reflects market exposure of original owner
Consistent with view of central bankers

pg.19
Issues for consideration: gold loans
If treated as transaction in gold:
Contrary to central bankers’ views
Contrary to market exposure of original owner
Central bankers unlikely to provide information
Avoids potential double count
Requires demonetization if deposited/lent to non-monetary authority
Creation of financial derivative probable


Source: http://www.oecd.org/dataoecd/60/21/2762829.ppt