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					Repo Contract

Sylvain Benoist
Andrew Parry

JP Morgan

version 3.0
2006-01-10



Introduction

This proposal introduces support for vanilla repo contracts, with mid life events,
which are supported both within the repo, and a separate message, together wit h
a cash and security transfer model, and is entirely backward compatible with
FpML 4

Examples have been provided for all proposed new types




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New Types
Repo Contract

As with all products in FpML the Repo Contract is accessed through a global
element 'repoContract' which can substitute the 'product' element used in the
construction of trade structures. The following diagram outlines the product
structure




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The 'repoContract' structure only defines parameters for product related information (e.g.
dates, rates, underlying assets, midlife events etc.) other trade related information (e.g.
trade date, indentifiers, legal documentation, etc.) is held in the containing trade structure.



The repeating 'spotLeg' and 'floatingLeg' elements contain the details of any scheduled
payments or exchanges during the life of the instrument and are described later. A simple
repo contract would contain two legs, typically one spot and one forward (the forward
transaction must be specified, unless the repo is open ended).

principalExchanges

The true/false flags indicating whether initial and final exchange of nominal
should occur. Instrument Borrow/Loan versus Fee do not involve exchange of
principal. If unspecified we assume it is true by default.

midlifeEvents

The optional 'midlifeEvents' element is a placeholder for Repo mid life events that occur
during the lifetime of the Repo.




Midlife events include:

A global element cash repricing event. This type of event is an adjustment of
the price of the underlying collateral done to reflect current market conditions.
The par amount is preserved constant, which means that the collateral quantity is
unchanged. It is the settlement amount that changes after a cash repricing, so a
cash repricing will trigger a cash movement.




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A global element collateral Substitution Event is representing a collateral
substitution. This structure is used for Buy-Sell Back trades to describe when a
coupon is paid and what reinvestment rate will be applied. the amount is in the
instrument currency. To be able to represent a buy/sell back with more than one
collateral we use an href link to the underlying asset. This enables us to
represent multiple coupons during the life of the trade, with different reinvestment
rates, and possibly different instruments.




A global element coupon event is representing a coupon event. This structure is
used for Buy-Sell Back trades to describe when a coupon is paid and what
reinvestment rate will be applied. the amount is in the instrument currency. To be
able to represent a buy/sell back with more than one collateral we use an href
link to the underlying asset. This enables us to represent multiple coupons during
the life of the trade, with different reinvestment rates, and possibly different
instruments.




Global element interest payout is representing an interest payout this structure
is used the amount to be paid. Note that we do not specify who is paying the
amount. Implicitly, the party that pays the repo Interest at maturity is the only
party that can do an interest payout. When necessary, it is possible to make the

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interest payout fully explicit, with parties and settlement instructions. Note that
the transfer date *may* differ from the eventDate specified by the event; for
example the date the payment is made can be 1 or 2 da ys after the interest has
been calculated. Note that for an interest payout the transfer can only contain a
cashTransfer as there are no security movements for an interest payout.




A global element nominal repricing event. This type of event is an adjustment
of the price of the underlying collateral done to reflect current market conditions.
The settlement amount is preserved constant, so it is the collateral quantity that
changes. A nominal repricing generates a security movement.




A global element rate change is a mid life event where on a given date, the repo
rate to apply is changed as a result of a bilateral agreement between the two
parties. There is no cash or security movement associated with a rate change.
The repo contract structure allows you to specify repo rates as a schedule, so
this type is not strictly required within the repo contract. We need it for
consistency and to allow a discrete event message to declare a rate change on a
trade.




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A global element rate observation is used only when a Repo is done against an
index (typically EONIA repos) and we want to record the observed rates during
the lifetime of the trade. This is similar in structure to a rate change, but the
application context is different. A rate observation has no cash or security
movement attached, so there is no transfer structure here. Rate observations are
required on floating rate repos to calculate the accrued repo interest.




Underlying Asset

An optional underlying asset element is referencing a global element underlying
asset that is defined in fpml-asset-4.2.sxd. An underlying asset element is a
placeholder for different underlying assets. Most repos are done using Bonds as
collateral; However it is technically possible to execute a repo on an equity, or
equity basket, as long as the mark to market is correctly done during the lifetime
of the repo.




Underlying assets include:


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fxRate - defines a simple underlying asset type that is an FX rate. Used for
specifying FX rates in the pricing and risk model.

index - defines the underlying asset when it is a financial index

mutualFund - defines the underlying asset when it is a mutual fund

interestRateIndex - defines a simple underlying asset that is an interest rate
index. Used for specifying benchmark assets in the market environment in the
pricing and risk model

simpleCreditDefaultSwap - defines a simple underlying asset that is a credit
default swap

simpleFra - defines a simple underlying asset that is a forward rate agreement

simpleIrSwap –defines a simple underlying asset that is a swap.




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Repo Transaction Leg

This type is used for the spot leg of the repo. A transaction leg for a repo is
equivalent to a single cash transaction.




Collateral is declared as optional here, with multiple cardinalities, since we can
do a repo "Multi", with multiple instruments specified, or a "Cash Borrow/Loan"
with no collateral. In general cases, however it should be specified.




8
Forward Repo Transaction Leg

This type is used for the forward leg of the repo. A transaction leg for a repo is
quivalent to a single cash transaction. It is augmented here to carry some values
that are of interest for the repo. Also note that the BuyerSeller model in this
transaction must be the exact opposite of the one found in the spot leg. The
forward transaction must be specified, unless the repo is open ended.




Collateral is declared as optional here, with multiple cardinalities, since we can
do a repo "Multi", with multiple instruments specified, or a "Cash Borrow/Loan"
with no collateral. In general cases, however it should be specified.

The repo interest is basically the difference between the settlement amounts at
spot and forward date. It is a fully figured amount, but it does not have to be
specified in the message. It is not a 'Money' amount as it is implicitly expressed
in the settlement currency.




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Settlement Transfer

This type is used for settlement transfer of cash and securities for the repo. This
is a container to carry 'transfers', i.e. elementary transfers of cash or securities.
Transfer instructions are coupled with settlement instructions that are referenced.

You can specify either a cash transfer, or a security transfer, or both, but the
structure below cannot be empty. Note the semantics of the structure: If we only
have a cash transfer it is a pure cash transfer, mapping to a MT202 or MT210; if
we have a security transfer only, it maps to a MT540 or 542 ( deliver or receive
free ). If the structure has both cash and security specified it maps to MT541 or
MT543 (deliver or receive against payment). The deliveryMethod tag allows us to
validate that the transfer is structurally valid.




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An elementary transfer - there can be as many transfers specified in this
structure as required.

deliveryMethod - Specifies the delivery method. There is a business rule
associated with this field: if deliveryMethod is DVP then you must specify a
cashTransfer and a securityTransfer at the same time. It is incorrect to specify
DVP and give only a cash transfer instruction.

transferDate - the date at which the transfer should occur




11
Examples

Please see examples in the /src/repo/examples/ directory




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