Margin Maintenance and Substitutions on Repurchase Agreements

Last updated: 1 June 2017

1. Margin Calls

As set out in the SIFMA/ICMA Agreement, amended and supplemented by the Reserve Bank within the RITS Regulations, margin is calculated and provided separately for open market operations and foreign currency repurchase agreements (OMO repos and foreign currency repos), on the one hand, and standing facility (SF) repos, on the other. For margin maintenance, the Reserve Bank will include the sale of securities under the AOFM Securities Lending Facility with OMO repos.

At the start of each business day, the Reserve Bank calculates its exposure to each of its counterparties. The market value of any security sold in an outstanding repo between the Reserve Bank and its counterparty is adjusted by the appropriate margin ratio (see Margin Ratios); these values are then compared with the applicable repurchase amounts, being the purchase prices adjusted for accrued interest.

For each counterparty, the individual ‘transaction exposures’ for OMO repos and foreign currency repos are then summed to derive the Reserve Bank's ‘net exposure’ to that party in respect of OMO repos and foreign currency repos. Separately, the transaction exposures for SF repos are also summed to derive the Reserve Bank’s net exposure to that party in respect of SF repos.

Where the Reserve Bank's net exposure in respect of OMO repos and foreign currency repos to a counterparty is greater than $1 million and represents more than 1 per cent of the net repurchase amounts agreed with that party, the Reserve Bank will call for margin equal to its net exposure. Similarly, where the Reserve Bank's net exposure in respect of an SF repo to a counterparty is greater than $1 million and represents more than 1 per cent of the net repurchase amounts agreed with that party, the Reserve Bank will call for margin equal to its net exposure.

The Reserve Bank will meet requests for margin from counterparties to which the Reserve Bank has a net exposure in respect of OMO and foreign currency repos greater than $1 million and where that net exposure represents more than 1 per cent of the net repurchase amounts agreed with that party. Similarly, the Reserve Bank will meet requests for margin from counterparties to which the Reserve Bank has a net exposure in respect of SF repos greater than $1 million and where that net exposure represents more than 1 per cent of the net repurchase amounts agreed with that party.

Margin calls must be met with eligible securities (see Eligible Securities). If a counterparty is holding any margin securities provided by the Reserve Bank to satisfy a previous margin call, these securities must be returned before additional margin securities are delivered. Similarly, the Reserve Bank will meet a margin call by first returning some or all of any margin securities previously provided by the counterparty and then by delivering securities from its own portfolio.

Prior to the delivery of margin, the Reserve Bank will agree all details with the counterparty, including the size of the call, the securities and the specific repos to which the margin will be attached. Margin transfer amounts will be rounded to the nearest $100,000.

Securities delivered to the Reserve Bank to meet a margin call are delivered through the Austraclear System free-of-payment. All margin called is due for same-day delivery if the call is made prior to 11 am (AEST/AEDT) and for next-business-day delivery if made after 11 am.

2. Treatment of Securities going Ex-interest

Where the term of a repurchase agreement spans the start of an ex-interest period, the market value of the securities held under reverse repurchase agreement will be adjusted to reflect the income due to the party recognised as the beneficial owner immediately prior to the record date.

3. Income Payments

Consistent with the terms of the SIFMA/ICMA Agreement under which the Reserve Bank executes its domestic market operations, where the Reserve Bank receives an income payment on a security it is holding under reverse repurchase agreement on the same day, the income payment will be transferred to the party that sold the security to the Reserve Bank in the repo. If, as a result of the transfer, margin is owing to the Reserve Bank, the counterparty will be required to meet the margin call with eligible securities delivered the same day as the income payment transfer.

Equivalent arrangements apply where an income payment is made on a security the Reserve Bank has sold under repurchase agreement.

4. Substitutions

The Reserve Bank endeavours to meet reasonable requests from counterparties to return to them securities that the Reserve Bank holds under an existing reverse repurchase agreement and receive replacement securities. The Reserve Bank is under no obligation to enter into such exchanges, and may decline to meet requests for collateral substitutions where counterparties are requesting a high volume of substitutions.

For repos contracted through the Reserve Bank's OMOs, these ‘substitutions’ are effected by maturing the old repo and agreeing to contract a new repo (whose maturity date and repo rate match that originally assigned to the old repo). The purchase price of the replacement securities must be equal to, or closely approximate, the repurchase price of the original securities.

The cut-off time for notification of a substitution on a reverse repo contracted in the Reserve Bank's OMOs is 3.00 pm (AEST/AEDT) on the day that the substitution is to take place. However, the Reserve Bank may consider requests after this time at its discretion.

The RITS member should contact the Reserve Bank's Domestic Markets Desk with details of the securities that it wishes to call back together with details of the securities that it will offer as replacement. The details should be provided in the following format:

Securities substituted out of repurchase agreement: {Today or T+1}
ISIN Issuer Maturity Date Face Value Repo Rate Repo Maturity
Securities substituted in to repurchase agreement
ISIN Issuer Security Type Maturity Date Face Value

For repos contracted through the Reserve Bank's standing facilities, counterparties seeking the return of securities previously sold to the Reserve Bank may also request termination of an existing repo and, where appropriate, arrange a new repurchase agreement. In this instance, the purchase prices of any replacement securities need not match the repurchase prices of the original securities.