Repurchase Agreement (Repos) FAQs

Questions posed at Repurchase Agreement Guidelines Launch 2012

No. Query Applicable Guideline Commission’s Response
1 When will the Repurchase Agreement Guidelines become effective? N/A The Repurchase Agreement Guidelines will become effective three (3) months from the date of issuance. Given that the date of issuance is April 23rd, 2012, the Repurchase Agreement Guidelines will become effective on July 23rd, 2012. 
2 What category of market actor would a Repo Seller be registered under?  Clause 5 (1) A Repo Seller is required to be registered as a Securities Company.
3 Why did the Commission decide to set the minimum capital requirement at TT$15 million when the minimum capital for securities companies is TT$5 million?  Clause 5(1) The capital requirement of TT$5 million for Securities Companies was set 15 years ago in 1997. Since that time the real value of that capital requirement would have decreased substantially. 

The Board gave due consideration to the Repo market and took into account the nature and the value of the market as well as the attendant risks involved. In light of the foregoing the capital requirement of TT$15 million was deemed to be a more realistic requirement for repo sellers than the existing TT$5million. The Guidelines will be under review and the effectiveness of this capital requirement will be assessed from time to time.

 
4 Will there be active monitoring of the Repo market? Clause 24 & 25 Yes. It is the intention of the Commission to actively monitor the Repo market. One of the ways that the Commission intends to monitor the activities is by reviewing the periodic submissions that are required in the Guidelines to be provided by the Repo Sellers and the Trinidad and Tobago Central Depository (“TTCD”). 
No. Query Applicable Guideline Commission’s Response
It is through the monitoring of the market that the Commission will assess the effectiveness of the Guidelines. 
5 What would be required to be included in the compliance log?  Clause 25 (1) The compliance log should be maintained by the compliance officer of the Repo Seller. It must record any deviations from the Guidelines and/or the Repo Seller’s own processes and procedures that are designed to facilitate compliance with the Guidelines. A record should be kept of the steps taken to rectify any deviations, the outcomes of such incidents, and the measures implemented to minimize the future occurrence of similar events. 
6 What type of underlying securities would Non Institutional Investors be able to access for Repo transactions? Clause 7(2) The Guidelines provide that Non Institutional Investors would have access to the following underlying securities:

  • Treasury Bills and Treasury Notes issued by the Government of the Republic of Trinidad & Tobago (“GORTT”);
  • Bonds issued or guaranteed by GORTT provided that those bonds were issued in Trinidad & Tobago; and
  • Corporate bonds listed on the Exchange.

 
7 For GORTT Eurobonds, why stop this as collateral for Repos for Non Institutional Investors simply because the TTCD is not ready for Eurobonds? Why not allow international bonds in the interim?  Clause 7(2) We believe that the systems that are in place at the TTCD would provide a greater level of protection to Non Institutional Investors. The Commission understands that the TTCD is working towards having this matter resolved. In the interim however, and in the interests of providing Non-Institutional Investors with as much protection as possible, the Commission is of the view that GORTT Eurobonds should not be used as collateral for Repos with Non Institutional Investors. 

For those Non Institutional Investors who wish to participate in transactions involving international bonds, the Guidelines provide for a mechanism whereby the Non-Institutional Investor may voluntarily relinquish the protections imposed by the Guidelines for Non-Institutional Investors. This option, however, requires that Non Institutional Investors meet certain criteria as set out in the Guidelines.

 
No. Query Applicable Guideline Commission’s Response
8 In other markets, Repo Buyers can ‘Re-repo’ the underlying securities, however, the Guidelines require that the custodian place a hold on the underlying securities.

  1. Why was this done as it reduces trading in the market?
  2. Are there plans to remove the “hold” condition at some point?

 

 N/A
  1. The Commission’s decision to ensure that collateral pledged with the TTCD cannot be ‘Repoed’ out more than once was in keeping with its mandate to ensure the orderly growth and development of the capital market. In a situation where one asset is “Repoed” in various transactions simultaneously, a default by one party in any leg of the Repo transaction can potentially lead to a disorderly ‘unraveling’ of the transactions. This can lead to an erosion of investor confidence in the Repo market and have systemic consequences for the financial system.

 

  1. The provisions of the Guidelines are not meant to be final. We will be reviewing the Guidelines from time to time. However at this time, unless there are cogent arguments to the contrary there are no plans to revise our position.

 
9 Where an institution which is regulated under the Financial Institutions Act 2008 enters into a Repo transaction, would the margin now replace the requirement to maintain a reserve requirement at the Central Bank of Trinidad and Tobago?  N/A The Guidelines are not meant to replace any of the requirements enforced by the Central Bank of Trinidad and Tobago. 

The Guidelines are not meant to impinge on the regulations issued by any other regulator.
10 Why were credit ratings not considered under the Margin requirements? Clause 17 (1) The Commission is aware that the credit risk of a security generally plays an integral part in the process of identifying the applicable margin. At this time however, the Commission is in the process of developing a framework to facilitate the regulation of Credit Rating Agencies. As such, the Commission did not believe that it was prudent to make reference to, or promote the use of the ratings, or credit rating agencies in the absence of a clearly defined policy position and regulatory framework on Credit Rating Agencies. We believe that before any of the Commission’s Guidelines or regulations can make reference to Credit Ratings or Credit Rating Agencies, an appropriate framework that 
No. Query Applicable Guideline Commission’s Response
would not only facilitate the regulation of these entities, but would ensure that the references thereto are made in the appropriate context, must be developed and implemented. As mentioned before, the Commission is working towards developing such a framework, at which point, the Guidelines will be amended to refer to the credit risk of securities when determining margin requirements. 
11 Would a template for ALL quarterly reporting be provided by the Commission? Clause 24(1)(ii) Yes. On reflection the Commission considers that it may be beneficial to provide a template for ALL quarterly reports required under the Guidelines. We will seek to provide the templates before the implementation date. 
12 Repo Guidelines are just Guidelines. How does the Commission intend to enforce them as they do not have the force of law?  N/A The Commission is aware that the Guidelines are not law. The Guidelines have been created however, pursuant to the powers granted to the Commission under Section 6(b) of the Securities Industry Act, 1995. 

Generally, Guidelines are mechanisms that are used internationally by regulators to provide direction and guidance to the market. Failure to comply with the Guidelines by one repo seller may erode investor confidence and negatively impact the repo market as a whole.

 

It is the intent of the Commission to eventually include these guidelines in the By-Laws which would have the force of law.

 

In light of the foregoing, the Commission expects that its registered market actors who participate in the Repo market will comply with the spirit and intent of the Guidelines.

 
13 Who would be responsible for marking to market? Clause 17(2) The Repo Seller would be responsible for marking to market. 
14 Is there a standardized methodology in arriving at the market values? N/A The Commission has not prescribed a specific valuation methodology for determining the market values of the securities underlying the Repo transactions. However, the Commission would be requesting that Repo Sellers submit 

 
No. Query Applicable Guideline Commission’s Response
the market valuation methodologies that they use for review. It is the intent of the Commission to eventually provide a standardized methodology to repo sellers. 
15 Repo Sellers are required to comply with the Guidelines by July 23rd, 2012.

  1. Do all existing Repos (as at July 23rd, 2012) have to be held by a third party custodian, or does this requirement only apply to Repo transactions going forward?
  2. How should Repo Sellers treat with Non Institutional Investors who hold USD denominated Repos backed by foreign issued GORTT bonds as at the implementation date (July 23rd, 2012)? Will these Repos be allowed to mature, or will the Repo Sellers be required to break these Repo agreements?

 

 N/A The Guidelines are intended to be applied to new Repo transactions from July 23rd, 2012. The Guidelines will not apply to existing Repo transactions. 

As such those Repo transactions that are in existence and extend past July 23rd, 2012 will be allowed to mature. The Repo Sellers are not required to break these Repo agreements.
16 Will the TTSEC be willing to review and approve the MRA, disclosure statement and term sheet developed by the Repo seller prior to the July 23rd, 2012 implementation date?  Clause 16 (1) The Guidelines set out the minimum areas that should be included in the MRA. Ideally, Repo Sellers should submit their standard MRA to the Commission to ensure that these minimum areas are included. The Commission will review and provide guidance if necessary on the MRA as well as the content of the disclosure statement and the term sheet. 
17 Since the TTCD is currently unable to take custody of foreign issued securities, please confirm that the foreign custodian is not required to place and remove holds on collateral for the benefit of investors. N/A The Guidelines do not have extraterritorial jurisdiction. We do however expect that the Repo Seller will do whatever is necessary and within its control to ensure that the Repo Buyer’s interest in the underlying security is recorded, if not in the records of the foreign custodian’s system, in the Repo Seller’s own records. The MRA essentially ought to, as per the Guidelines, specify the custody arrangements regarding the collateral.

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