Repos and Securities Lending (GMRA, GMSLA)

Repos and securities lending come up when you fund the assets held to hedge a total return swap (TRS) and when arranging securities to borrow for a short sale.

The shape of a sale and repurchase

In a repo, the seller sells assets such as bonds to the buyer and buys them back on an agreed future date. The assets bought back need not be the very ones handed over, as long as they are of the same issue¹.

Because the assets are sold outright on the start date, the buyer becomes the owner. If the seller defaults, the buyer can sell the assets as owner to a third party and cover the loss, so the assets work as collateral¹. At the same time, the seller has promised to buy back, so both the buyer's use of the assets and the seller's use of the proceeds are temporary. Legally it is a sale and a repurchase, but economically it works like a loan in which the buyer lends cash to the seller against the assets as collateral¹.

The difference between the purchase price and the repurchase price is the return on the cash the buyer effectively lends. Expressed as an annual rate, it is the repo rate. The buyer, who provides the cash, is sometimes said to be doing a reverse repo¹.

Consider a hypothetical example in which Bank K sells Securities Firm L a government bond with a market value of 10 billion yen and buys it back 30 days later. With a haircut of 2% (2% deducted from market value), the purchase price is 9.8 billion yen. The repo rate is 1.2% per year, and the day count is actual days divided by a 360-day year. The interest is 9.8 billion yen × 1.2% × 30/360, or 9.8 million yen, so the repurchase price is 9,809.8 million yen.

Figure description

Bank K receives the purchase price on the start date and pays the repurchase price on the end date. The amounts are the same as in the worked example in the text, and the repurchase price is larger than the purchase price by the amount of interest. The bond itself is not shown, only the cash.

Securities Firm L lends 9.8 billion yen for 30 days against the bond and receives 9.8 million yen. Bank K pays 9.8 million yen to raise the funds. If the bond price moves in the meantime, the repurchase price stays at 9,809.8 million yen, so Bank K keeps both the gain from a rise and the loss from a fall. Interest on the bond goes to Securities Firm L as the owner, but under the GMRA, Securities Firm L pays the same amount to Bank K².

As of August 2025, repos in Japan take two forms. One is the gensaki transaction, a sale made on the condition that the opposite transaction is carried out after a fixed period. The other is the cash-collateralized bond lending transaction, in which bonds are lent against cash as collateral. In a footnote to the BOJ Review, the authors at the Bank of Japan's Financial Markets Department describe the two as broadly the same in economic terms and say that the gensaki transaction is the more common form globally³.

Haircut and loss of collateral value

The purchase price is the market value of the bond minus the haircut. The haircut is the difference between the market value on the start date and the purchase price, expressed as a percentage of market value. It can also be expressed as the market value as a percentage of the purchase price (such as 105%), which the sources call initial margin. The two differ only in how they are expressed, and they work the same way⁴.

The haircut is a cushion against the following losses: price changes between the call for variation margin and its delivery, the cost and price impact of selling collateral after a default, and default by the issuer of the collateral. If the cash and the collateral are in different currencies, exchange rate moves add to the list. If the credit quality of the counterparty and that of the collateral issuer tend to deteriorate together, the benefit of the collateral falls⁴.

Collateral with low credit and liquidity risk is easier to value for a sale after a default. The most common repo collateral is domestic bonds of creditworthy governments⁴. The buyer's loss can grow if either party is slow to respond to a call for variation margin. The same applies if title to the collateral or the right to net is challenged in court⁴. Collateral that is less liquid can become hard to sell in a market disruption after a default⁵.

During the transaction, the collateral is revalued frequently, ideally daily. If its value falls, the buyer calls for variation margin to restore the balance between cash and collateral. If it rises, the reverse applies⁵.

In the example above, the required market value of the collateral is the purchase price divided by (1 − haircut): 9.8 ÷ 0.98 = 10 billion yen. Ignoring interest, the calls when the market value of the bond moves are as follows.

Bank K provides more collateral when the bond falls in value and takes back the excess when it rises. From the viewpoint of Securities Firm L, the cash it lent stays covered by collateral as long as the market value of the bond does not fall below 9.8 billion yen between the call and the delivery. A fall beyond that can become a loss to Securities Firm L if Bank K defaults.

The lender and the borrower in securities lending

In securities lending, the lender lends securities to the borrower and, after a period, gets back securities of the same kind. In the international market, as in a repo, title to the securities passes to the borrower, and title to the collateral the borrower delivers passes to the lender. The party that provides the securities is still called the lender, and the party that receives them the borrower, even though title passes. There are also forms in which the collateral is pledged and loans without collateral⁶.

Collateral is either other securities or cash. When the collateral is securities, the borrower pays the lender a lending fee. When it is cash, the lender invests the cash and pays part of the investment return to the borrower as a rebate. The lending fee is often deducted from this rebate, so it is included in the rebate rate⁶. Some lenders that receive cash collateral take credit and liquidity risk in reinvesting it, in pursuit of a higher return⁷.

Under the January 2010 version of the GMSLA, the market value of the collateral is kept at or above the market value of the loaned securities plus a percentage that is set for each type of collateral (called Margin in the agreement)⁸.

The lending fee is calculated by multiplying the daily market value of the loaned securities by an agreed rate. When the collateral is cash, the lender pays the borrower interest on the cash at an agreed rate, and this can be set off against the lending fee⁹.

Under the terms of each transaction, the lender can ask for the loaned securities back by giving notice at least as long as the period normally needed for settlement. The borrower can also return the securities at any time, subject to the terms of the transaction¹⁰.

If a record date for a dividend or interest falls while the securities are on loan, the borrower pays the lender an equal amount¹¹.

In equity lending, voting rights and rights offerings also pass to the borrower, so it is the practice to state the lender's right to recall. This practice is the same in bond lending. In a repo, the seller has no right to demand return during the term unless it has been agreed⁶.

Consider a hypothetical example in which Bank K borrows equities with a market value of 1 billion yen from Securities Firm L. The collateral is securities, and the percentage added is 5%. The market value of the collateral is kept at or above 1 billion yen × 1.05, or 1.05 billion yen. The lending fee is 0.6% per year, so for 30 days it is 1 billion yen × 0.6% × 30/360, or 500,000 yen.

Reuse and re-pledging of collateral

Using received collateral in another transaction, or selling it, is called reuse here. The sources call it re-use or rehypothecation, and its scope differs by source. The International Capital Market Association (ICMA) uses rehypothecation for re-pledging of pledged collateral, while the FSB uses rehypothecation for the re-use of assets that a customer has deposited.

In the pledge form, the collateral stays in the ownership of the party that gave it and is pledged to the other party. When the receiving party in turn pledges that collateral in another transaction, this is re-pledging. The ICMA FAQ calls this re-pledging rehypothecation and explains that in derivatives markets it is also called re-use. In the repo market, re-use means a sale of the collateral by the buyer¹².

The 2013 framework of the Financial Stability Board (FSB) defines re-use as any use of securities delivered in one transaction as collateral in another, and limits rehypothecation to the re-use of assets that a customer has deposited¹³.

The legal form also differs between a repo and a pledge. In a repo, the buyer is the owner and can dispose of the purchased assets at its own discretion. In a pledge, title to the collateral stays with the giver, and the pledge ends when the receiver exercises its right to re-pledge. The giver has a contractual right to the return of equivalent collateral, but this is an unsecured claim¹².

The FSB notes that reuse can increase leverage. For re-pledging of assets that customers have deposited, it recommends disclosures that let the customer understand its position if the intermediary fails¹³.

The GMRA and GMSLA contracts

The GMRA is the standard agreement for repos and the GMSLA for securities lending. The ICMA describes the GMRA as the main agreement for international repos and the GMSLA as the most widely used agreement for international securities lending¹⁴⁶. Under both, on default, close-out netting reduces the amounts to a single balance¹⁵¹⁶. The January 2010 version of the GMSLA sets its terms in a main body and a Schedule, and individual transactions are agreed in advance and verified by confirmation¹⁷.

Derivative hedges and collateral transformation

A repo is not a derivative. A derivative exchanges only gains and losses without delivering principal, while a repo temporarily exchanges principal and collateral¹⁸.

Combining a sale of a bond with a TRS produces the same economics as a repo. If the seller sells the bond and at the same time enters a TRS that returns the bond's return to the seller, the buyer provides cash and the seller keeps the risk. A TRS alone involves no exchange of cash, and the repo side provides the cash¹⁸.

A position in bonds or equities held to hedge a derivative can be funded through a repo. Securities for a short position (a position from selling securities not yet owned) can be borrowed through a repo or securities lending and delivered. What serves as the hedge, however, is the position, not the repo itself¹⁸¹⁹. How a dealer takes a TRS order from a counterparty and builds a hedge in the underlying asset is covered in Equity Swaps and Total Return Swaps.

In the lending example above, suppose Bank K sells the borrowed equities and, 30 days later, buys them back and returns them. If the share price falls 10%, Bank K gains 100 million yen less the 500,000 yen lending fee, or 99.5 million yen. If it rises 10%, Bank K loses 100 million yen plus the 500,000 yen lending fee, or 100.5 million yen. If a record date for a dividend falls in between, the amount paid to the lender is added. In theory, the loss on a short position has no upper limit, and the gain is capped at the amount the share price can fall, which is to zero¹⁹. Trading costs and the cost of collateral are not included.

Collateral transformation is a transaction that swaps lower-quality collateral for higher-quality collateral through securities lending, collateral swaps, and similar transactions²⁰.

Funding through reuse and transformation of collateral is covered in Sourcing and Substituting Collateral.

Notes

1. ICMA, "Frequently Asked Questions on Repo" (external site), question 1, "What is a repo?" ↩ ↩² ↩³ ↩⁴

2. The ICMA FAQ, question 22. Who receives the interest, and the payment of the same amount under the GMRA. ↩

3. Bank of Japan, Financial Markets Department, "本邦レポ市場のトレンドと近年の特徴点" (Trends and Recent Features of Japan's Repo Market) (external site) (BOJ Review 2025-J-7, August 2025, in Japanese), footnote 4. The Review notes that its opinions belong to the authors and do not necessarily represent the views of the Bank of Japan. ↩

4. The ICMA FAQ, question 21, "What is a haircut?" ↩ ↩² ↩³ ↩⁴

5. The ICMA FAQ, question 20, "How do repo parties ensure they have enough collateral?" ↩ ↩²

6. The ICMA FAQ, question 13, "What is the difference between repo and securities lending?" ↩ ↩² ↩³ ↩⁴

7. FSB, "Securities Lending and Repos: Market Overview and Financial Stability Issues" (external site) (interim report, April 27, 2012), section 2.5 (page 8). ↩

8. GMSLA (January 2010 version) (external site), paragraph 5.4(a) and Schedule paragraph 1.2 (market value of collateral and the added percentage). ↩

9. The GMSLA (January 2010 version), paragraphs 7.1 and 7.2 (lending fee, interest on cash collateral, set-off). ↩

10. The GMSLA (January 2010 version), paragraph 8.1 (termination by the lender and the call for return) and paragraph 8.2 (termination by the borrower). ↩

11. The GMSLA (January 2010 version), paragraph 6.2 (payment of an amount equal to income on the loaned securities). ↩

12. The ICMA FAQ, question 10, "What is 'rehypothecation' of collateral?" ↩ ↩²

13. FSB, "Strengthening Oversight and Regulation of Shadow Banking: Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos" (external site) (August 29, 2013), section 3.2 (page 15). ↩ ↩²

14. The ICMA FAQ, question 19, "What is the GMRA?" ↩

15. The ICMA FAQ, question 26, "What happens to repo in a default?" ↩

16. The GMSLA (January 2010 version), paragraph 11.2. ↩

17. The GMSLA (January 2010 version), table of contents, paragraph 3 (confirmation of transactions), and the Schedule. ↩

18. The ICMA FAQ, question 40, "Is repo a derivative?" ↩ ↩² ↩³

19. The ICMA FAQ, question 30, "What is 'short selling' and what is the role of repo?" ↩ ↩²

20. The FSB interim report of April 2012, section 2.4(ii). An example of upgrading lower-quality collateral to higher-quality collateral. ↩