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FRM Part II · FRM Exam Part II · Repurchase Agreements and Financing

A dealer holds a bond that a client wants to short. The dealer lends the bond overnight to the client's lender chain and takes a general collateral repo to finance other inventory. Which feature distinguishes a special repo from a general collateral (GC) repo?

A special repo trades at a lower rate than general collateral because the cash lender is paying for access to a specific, scarce security. GC repos accept any eligible security in a basket, so no scarcity premium arises and the rate sits higher.

  1. AThe repo rate on a special security is lower than the GC rate because the cash lender wants that specific securityCorrect
  2. BThe repo rate on a special security is higher than the GC rate because it carries more credit risk
  3. CSpecial repos accept any security from a basket, while GC repos name one security
  4. DSpecial repos have no haircut, while GC repos always carry one

Explanation

In a special repo the cash lender seeks a particular security, so is willing to lend cash at a lower rate than GC; the rate discount reflects the security's scarcity value. In GC repos any security from an acceptable basket works. The reverse of the options for baskets and security-specific demand is therefore wrong.

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