Dutch repo law ends risk of recharacterization

Author: | Published: 1 Nov 2000

Over the years, repurchase agreements (commonly known as repos) have become an important financing tool for investment banks in The Netherlands. Dutch custodians have become important market players in the provision of tri-party repo services to corporate and institutional investors. Repos are also used by De Nederlandsche Bank, the Dutch central bank, to intervene in the money market.

In a repo, a seller's securities are sold to a buyer on the basis of an agreement that the seller will repurchase equivalent securities at a later date. The repurchase price is equal to the purchase price plus a price differential, which is economically equivalent to interest. Usually, the value of the securities exceeds the amount of the purchase price, to cover any market risk of liquidating the securities in the event of default. Most repo transactions entered into by Dutch parties are governed by the 1995 PSA/ISMA Global Master Repurchase Agreement (GMRA). Repo transactions are likely to be governed by...