A "repo", also known as a "repurchase agreement", is a contract whereby one party makes a spot sale of a nominal amount of securities to a counterparty (from the perspective of the counterparty, this is a "reverse repo") and at the same time undertakes to repurchase the same nominal amount of securities in the future, with the same characteristics, and at a price agreed in advance. The difference between the spot price and the forward price is determined by the repo rate.
Repos have the advantage of more effective financing for a securities lender given that the counterparty incurs less credit risk when receiving the securities: in the event that the securities lender goes bankrupt, the counterparty still retains the securities.
Within the scope of its daily cash management, the Treasury uses repos and reverse repos respectively in situations of cash deficit or surplus.
A rating (score) of the quality of a counterparty which has been assessed by ratings agencies.
See "Recognized Dealers"
Financial intermediaries linked to the Treasury via a code of duties. They are distinguished from Primary Dealers by the fact that they have fewer rights and obligations, given that their essential purpose is to promote Belgian public debt abroad.
See "Repurchase agreement"
Facility created by the Treasury for primary and recognized dealers with the aim of ensuring the proper functioning of the market for securities of the public debt.
If there is a delivery of securities, the Treasury will provide for the missing securities via a repo transaction concluded for one day and under certain conditions.
See "Repurchase agreement"
In the strict sense, this refers to the impossibility of refinancing loans which are maturing, on the market (credit crunch). More realistically, this is the risk that borrowing will become more expensive due to significant financing requirements. Refinancing risk is therefore determined by the annual amount of the public debt coming to final maturity which needs to be refinanced. The more the maturity of the debt is spread, the more the refinancing risk decreases and vice-versa.
As such, refinancing limits have been set which correspond to an annual financing amount which can be achieved without having to make substantial concessions in terms of the yield or the price. The amount of the debt in euros which needs to be refinanced within 12 months cannot therefore exceed a certain percentage of the amount outstanding. Furthermore, the euro-denominated debt to be refinanced within 5 years is also limited in relation to the amount outstanding. These percentages are calculated on the basis of a 6-month moving average.
Rate re-setting risk
The risk of having to refinance at higher levels in the future, following an increase in the general price index. In the first instance, the spreading of the maturity of the debt gives an indication of the impact of the rates on future budgets. A uniform spreading of the debt makes it possible to regularly re-set the coupons in the portfolio. Secondly, limits have been set for the rate re-setting risk at 12 months (a maximum percentage of the debt for which the coupon can be re-set within twelve months) and for the risk at 60 months (a maximum percentage of the debt for which the coupon can be re-set within sixty months). Additionally, the amount to be re-set in the intermediary period, in other words between the second and fifth year, cannot increase by more than 20% on an annual basis.
Interest rate swaps are financial products which make it possible to manage this type of risk.