A repo (repurchase agreement) under which the collateral (posted by the repo seller) is not handed over to the cash lender (the repo buyer), but held in safekeeping by the repo seller. The collateral is held in custody 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 (counterparty risk) because he only has the dealer’s pledge that his cash is indeed fully collateralized in the event of default.
A safekeeping repo is also known as a hold-in-custody repo (HIC repo), a letter repo, a trust-me repo, or a due-bill repo.
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