The legal and economic underpinnings of repo transactions: a comparative overview



The legal and economic underpinnings of repo transactions: a comparative overview*

 

di Luca Meneghini**

 

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Despite being at the forefront of banking and financial markets, repurchase agreements have thus far received little attention in the legal literature compared to other financial activities. Aim of this paper is to shed some more light on repurchase agreements, providing a better understanding of the legal and economic implications underlying repo transactions. Specifically, we seek to provide a meaningful comparison of the legal frameworks for repos in the United States and in Europe.

 

* This paper was approved by the referees 

**J.D. Trieste – LL.M. Finance candidate at Institute for Law and Finance

 

Rivista di Diritto del Risparmio 12/2019

 

 

  1. Introduction

 

Repurchase agreements – known as repos – are one of the main sources of liquidity for the financial system. On the one hand, they are used in the money market with the primary aim of funding short-term positions or settling financing operations for banking and financial institutions. On the other hand, repos are routinely used by central banks as a monetary policy tool in open market operations in order to increase or decrease the aggregate money supply in the economy.

Despite being at the forefront of banking and financial markets, repo has thus far received little attention in the legal literature compared to other financial activities. Furthermore, legal scholars have barely exploited comparative analysis to better understand the common regulatory patterns and legal structures of repos across jurisdictions. Against this backdrop, aim of this paper is to shed some more light on repurchase agreements, providing a better understanding of the legal and economic implications underlying repo transactions. In our view, the law of a single country does not constitute in itself a useful subject of analysis due to the enormous size of the repo market and its interconnectedness to the global financial system. In view of this premise, we seek to provide a meaningful comparison of the legal frameworks for repos in the United States and in Europe, as these continental markets represent by far the largest portion of the global repo market.

 

  1. The legal and economic structure of repo transactions

 

Repurchase agreements have a peculiar legal construct. On a preliminary basis, repos can be defined as a sale of financial assets coupled with a promise to repurchase the same assets at a later date at a pre-specified price[1]. A legal analysis of repurchase agreements requires an understanding of the transaction underlying these contracts. Most of the difficulties in determining a clear legal framework come from the repo being defined as a “sale and repurchase of the underlying security”. However, from a substantive perspective, repos are similar to secured loans disguised as a sale

 

 

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