Fully Closed Repo (FCR) Trade Basics Explained
Step 1: ALP lends money for 30 days to a Trade Counterparty who owns US Treasury bonds with final maturities of less than 2 years and uses those bonds as collateral for the loan.
Step 2: ALP borrows the same amount of money for the same 30-day period from the same Trade Counterparty at a rate 12-basis points higher than the first trade and uses the same bonds as collateral.
Step 3: Step 1 and Step 2 are paired off. Bonds never leave ALP's Trade Counterparty's custodial account.
Step 4: The only money to change hands is the 12-basis points paid by ALP to their Trade Counterparty.
Step 5: Under the Repo Annex, ALP will have the right to make Treasury for Treasury collateral substitutions while maintaining the original portfolio WAM differential of plus or minus 5 days
Trade Approval vs Product Approval (FCR is trade. It is not a Product!): If your entity is currently approved to buy and sell U.S. Treasury securities and repurchase agreements, then no additional approvals should be necessary.
What is ALP's FCR Trade Motivation?
Fixed Cost Alternative: In lieu of ALP accessing dealer-based Repo facilities for arbitraging relative value trade opportunities at unknown costs, ALP's 12-basis point offer is a fixed cost alternative whereby ALP is less dependent on the dealer community for balance sheet access.
Cost Management and Attractive Terms: In addition to managing ALP's cost structure, FCR trades, by virtue of paying 12 basis points, provides attractive terms to Beneficial Owners of ultra-short U.S. Treasury portfolios.
Risk Elimination and Mutual Benefit: ALP via FCR Trades developed a method to eliminate the risks associated with other securities lending models, and by executing FCR trades, both Counterparty and ALP benefit significantly.
Why 12 Basis Points:
ALP arrived at offering 12 basis points because it provides a geometrically larger enhancement with 100% portfolio utilization, while eliminating risks. This is superior to current securities lending models, which are subject to risks and have utilization rates below 100%.
Beneficial Owners Upside vs. Downside Executing FCR Trades:
The upside is a 12-basis points enhancement on 100% of a under two-year U.S. Treasury portfolio, paid upfront on the settlement date while always in possession of your portfolio, absent of risk, while keeping liquidity and safety intact.
The downside is the opportunity cost with potentially having your FCR portfolio extended or shortened by a maximum of 5 days when you may not want it to be. The value of a 5-day differential is de minimis, and Beneficial Owners are more than compensated for this with the 12-basis points enhancement.
Please click the highlighted link to view our firms' spokeswoman discussing Fully Closed Repo in more detail (Enhancing your Treasury Holdings with Fully Closed Repo)
To schedule a call with AgentLenderPLUS, contact Lew Goldman at lgoldman@agentlenderplus.com