Repurchase agreements (repos) are the sale by a bank or dealer of a government security with the simultaneous agreement to repurchase the security on a later date. Repos are commonly used by public entities to secure money market rates of interest.
The Government Finance Officers Association (GFOA) affirms that repurchase agreements are an integral part of an investment program of state and local governments. Furthermore, public finance officers are encouraged to develop policies and procedures to insure the safety of such investments.
Governmental entities and investment officers should exercise special caution in selecting parties with whom they will conduct repurchase transactions, and be able to identify the parties acting as principals to the transaction.
Proper collateralization practices are necessary to protect the public funds invested in repurchase agreements. Risk is significantly reduced by delivery of underlying securities through physical delivery or safekeeping with the purchaser's custodian. Over- collateralization, commonly called "haircuts," or marking-to-market practices should be mandatory procedures.
To protect public funds, the GFOA will work with securities dealers, banks, and their respective associations, to promote improved repurchase agreement procedures through master repurchase agreements that protect purchasers' interests, universal standards for delivery procedures, and written risk disclosures.
GFOA recommends general use of master repurchase agreements, subject to appropriate legal and technical review. Governments using the prototype agreement developed by the Public Securities Association should include appropriate supplemental provisions regarding delivery, substitution, margin maintenance, margin amounts, seller representations and governing law.
Despite contractual agreements to the contrary, receivers, bankruptcy courts and federal agencies have interfered with the liquidation of repurchase agreement collateral. Therefore, the GFOA encourages Congress to eliminate statutory and regulatory obstacles to perfected security interests and liquidation of repurchase collateral in the event of default.
- Publication date: June 1986