Some commentators have suggested that the reverse reverse repurchase account deficit deduction should be similar to the proposed fee for pension deficits. 12 Under the proposal, the broker-dealer would not deduct the entire deficit of repo, but a deficit of reverse repurchase agreements. The proposal would only require a deduction if the reverse repurchase agreement deficit exceeds certain established restrictions. The Commission has designed the repo deficit deductions in this way to take into account the fact that broker-dealers generally offer excess securities as part of a repo as a “buffer” or margin. Conversely, the Commission assumes that dealer dealers who repo usually receive surplus securities. Therefore, the deduction for reverse reverse reverse repurchase agreement deficits reflects not only the risk, but also current industry practices more accurately. Accordingly, the Commission adopted the proposed amendment. Questions relating to this communication may be directed to I. William Fishkind, Managing Director, NASD Financial Responsibility, at (202) 728-8405. The Commission does not want to interfere with the normal credit policy of a broker-dealer. However, the Commission considers that the leverage gained in the buyback transactions is so significant that some restraint is required. Restrictions on the use of “client property” are usually imposed under rule 15c3-3, which prevents the use of client funds and securities to finance broker-dealer`s inventory. If Rule 15c3-3 applied to reverse repurchase agreements, this amendment would not be necessary.

However, the Board, which relies to some extent on the Securities Investor Protection Corporation`s conclusion that pension members l4 are not clients within the meaning of the Securities Investor Protection Act, has not taken the position that pension members are “clients” within the meaning of Rule 15c3-3. Such a provision would, in fact, result in a 100% capital burden on the excess margin, since the broker-dealer would likely finance the additional deposit of the reserve account with his own capital Rule 17a-3 prescribes the books and records that a broker-dealer must keep. In particular, the proposed amendments require a dealer-dealer to: (i) maintain a separate general ledger reflecting the assets and liabilities arising from reverse repurchase and reverse repurchase agreements (commonly referred to as the “repo portfolio”); (ii) enter the transferable securities which are the subject of a repurchase and transfer of securities in the securities register; and (iii) keep copies of the confirmations it sends in connection with the repurchase agreements. Commentators generally supported the amendments to Article 17a(3) and the Commission decided to adopt the proposed amendments in order to ensure the liability of funds and securities involved in repo transactions. Fed repurchase agreements are settled DVP in which securities are moved against simultaneous payment. In this case, the Fed sends guarantees to the traders` clearing bank, which triggers a simultaneous movement of money against the security. At this stage, the reserve balances will be abolished. When the trade matures, the trader returns the guarantee to the Fed`s DVP, triggering the simultaneous return of the broker`s funds. This law recreates reserve balances that have expired on the front portion of the transaction. 15 The Commission understands that it is difficult for broker-dealers who enter into large repurchase agreements to determine whether certain securities acquired under a reverse repurchase agreement have been used by the undertaking to obtain the use of funds. The Commission is prepared to consider applications from broker-dealers who can demonstrate that certain securities received under a reverse repurchase agreement have not been used to raise funds.

While most dealer dealers adequately protect themselves against the credit risks associated with repo by receiving securities that are valued beyond the funds they have extended under the agreement, some dealer dealers create leverage by securing the use of funds through concerted repurchase agreements. These broker-dealers enter into reverse repurchase agreements, receive securities significantly in excess of the amount advanced, and then sell the securities in accordance with the repurchase agreements for an amount in cash in excess of the amount advanced under the reverse repurchase agreements. The net funds received are then used in the broker-dealer`s activities. Market participants often use reverse repurchase agreements and EIA operations to acquire funds or use funds for short periods of time. However, transactions in which the central bank is not involved do not affect the total reserves of the banking system. In some cases, the underlying security may lose its market value during the term of the pension contract. The buyer can ask the seller to fund a margin account where the price difference is balanced. .