Mastering Fully Closed Repo:

 

6 Essential Steps to Optimize Your Buy and Hold U.S. Treasury Portfolio 

 

In the ever-evolving landscape of U.S. Treasury portfolio management, maximizing returns while minimizing risk is paramount for investors. Fully Closed Repo transactions offer a groundbreaking alternative to traditional securities lending, providing portfolio owners with enhanced yields, unparalleled safety, and liquidity. By leveraging AgentLenderPLUS's innovative approach, investors can generate predictable income without exposing their portfolios to counterparty risk, cash collateral reinvestment risk, or the need for indemnification. This guide outlines six essential steps to mastering Fully Closed Repo transactions, showcasing how this strategy optimizes buy-and-hold U.S. Treasury portfolios while maintaining complete control over assets.

 

Step #1: The initial step involves the U.S. Treasury Beneficial Owner and their Counterparty signing a Master Repurchase Agreement, including an Annex.

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Step #2: The U.S. Treasury Beneficial Owner and the same Counterparty buy and sell identical offsetting Repos for the same term, using the same securities.

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Step #3: Pairing off the Repo buy and Repo sell transactions from Step #2 eliminates settlement risk, ensuring that securities and cash remain in the Beneficial Owner's account.

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Step #4: On the Settlement Date, the Beneficial Owner's Counterparty wires an upfront option premium to the Beneficial Owner for the right to make unlimited collateral substitutions under the terms stipulated in the Annex to the Repo Agreement. This step eliminates credit risk.

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Step #5: Periodically, the Beneficial Owner's Counterparty has the right to make collateral substitutions under the Annex of the Repo Agreements. The Annex ensures that, throughout the life of the trade, the Weighted Average Maturity (WAM) of the Beneficial Owner's portfolio varies by no more than ±5 days. Because substitutions are settled under the clearing firm’s Fixed Income Clearing Corporation membership, settlement risk is again eliminated.

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Step #6: At the end of the repo term, the portfolio owner assumes legal ownership of all securities in their custody account. This is achieved by selling the original securities and buying the current securities held at equal yield, all transactions are paired off to eliminate settlement risk (as in Step #2).

 

NOTE #1: Steps #1 through #4: In addition to eliminating Counterparty Risk (Step #2), Settlement Risk (Step #3), and Credit Risk (Step #4), executing a Fully Closed Repo transaction as an alternative to securities lending avoids Cash Collateral Reinvestment Risk (since there is no cash to invest) and renders the need for Indemnification moot because the Beneficial Owner's Counterparty returned all the securities in Step #2.

 

NOTE #2: Beneficial Owners retain the sole right to terminate the term Repo's in whole or in part at their discretion, making Fully Closed Repo transactions liquid and safe, as Beneficial Owners are always in possession of their collateral.

 

AgentLenderPLUS is currently paying their trade counterparties (U.S. Treasury Beneficial Owners) 12 basis points per annum on 1-Month Term Fully Closed Repo transactions. For additional information, contact Lew Goldman at lgoldman@agentlenderplus.com

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