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The pitfalls and opportunities in RMB repo

Repurchase agreements (repos) are an integral part of global financial markets and they represent the largest, most liquid money market instrument for RMB money market funds.

When an investor buys a repo contract, they buy a security and the seller commits to buying that same security back from the buyer at a specified price on a designated future date. In Western markets, repo contracts have strong legal frameworks, ensuring transparency for investors. There is less clarity, however, in the repo markets found in China – interbank repos and stock exchange repos. According to a report from JPMorgan, this has created uncertainty and concern among investors: “the lack of clarity regarding collateral and counterparty risk, as well as confusion about how repo markets operate, has created uncertainty and concern, especially among Western investors.”

Nonetheless, as interest rates have not yet been fully liberalised in China, repo remains a crucial investment option for RMB money market funds. While interbank repos are the dominant market for RMB repo, money market funds invest mainly in stock exchange repo, which provides quasi-sovereign counterparty risk and more timely settlement than interbank repo, albeit with greater volatility, according to the report by JPMorgan. Stock exchange repos offer:

  • uniform counterparty risk,
  • real-time monitoring and
  • genuine market- driven dynamics

However, investors have three main concerns:

  • repo market operations,
  • collateral quality and
  • counterparty risk

A report by JPMorgan - China’s repo markets: The structure and safeguards of China’s largest, most liquid money market instruments – provides an overview of RMB repo for investors interested in making better use of the market.

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