On Repo Transactions

This year I became Chairman of the Board of Directors of the brokerage firm Teniz Capital Investments Banking. In light of this new line of work, I decided to start publishing information about alternatives to financial instruments such as the deposit.

I ran a poll on my Instagram, and it turned out that 92% of my followers don't quite know what repo is, so my first post will be about repo transactions.

In the financial world there is a type of investment known as the repo transaction. The word "repo" comes from "repurchase agreement" and refers to borrowing against a pledge of liquid securities. The idea is as follows: one party has spare cash, while another holds spare liquid securities but needs liquidity. The holder of the securities raises liquidity at a market rate by pledging them as collateral. As a rule, repo transactions are conducted on the organized securities market, which in Kazakhstan means KASE. The more secure the security used to raise funds, the lower the rate. In tenge terms, the safest securities are government securities. Placing liquidity in repo is technically safer than placing it in deposits, because the money is backed by a pledge of securities, whereas a deposit is unsecured and rests solely on our trust in a particular bank.

Banks also place most of their own spare liquidity in repo, because repo maturities vary widely (from 1 to 90 days), and banks are essentially intermediaries in managing our money.

Few people know that through any broker, any company, and even any private individual can place spare funds in repo, which yields more than deposits of comparable maturity. This is especially relevant for legal entities.

Here is one more small secret: you can also place foreign currency in repo and earn a yield of up to 4.5%, which is significantly higher than on dollar deposits.

For this reason, companies, as well as individuals with savings above KZT 20 million, have good reason to manage their liquidity through repo transactions. The counterparty in repo transactions is the Central Securities Depository, which means that risks on the securities are greatly reduced.

But the possible risks must also be spelled out. The biggest risk is a sudden, one-off crisis, like the one in 2008. At that time, the haircut applied to pledged securities could prove insufficient after a crash, and in such cases many counterparties handed over the pledged securities instead of cash. For this reason, it is important to accept as collateral only securities that can recover their value fairly quickly after a crash. If such securities end up in your hands, my advice is not to sell them but to hold them until markets recover. History shows that markets recover fairly quickly. In any case, a good adviser will explain all the possible risks and the ways to minimize them.