A form of repurchase agreement (repo) in which the borrower of cash doesn’t deliver out the collateral, but rather keeps it in his custody (i.e., in a separate customer account maintained by the seller/borrower). In other words, the seller of securities retains custody of the securities used as collateral on behalf of the buyer. Since securities do not physically move, no settlement charges are incurred in such a repurchase agreement. However, this exposes the investor (the buyer) to some degree of risk because he only has the dealer’s pledge that his cash is indeed fully collateralized in the event of default.
This type of repo is known as a letter repo, a “trust me” repo, or a hold-in-custody repo.
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