In light of the actual and potential financial harm that repo investors faced after failures of several repo market participants,this Note proposes a new legal characterization of repos and argues for adoption of proposed Bankruptcy Code amendments pertaining to repos. Both of these suggestions would give repo investors significant future financial protection without destroying the financially attractive characteristics of repurchase agreements.
Part II of this Note begins laying the foundation for this proposal by discussing current repo market problems that the failures of several repoissiers have exposed.
Part II discusses new policies concerning the appropriate uses of the collateral securities underlying repo transactions, the rights of repo investors against insolvent repo issuers, and the need for disclosure to repo investors of financial information concerning repo issuers. Part III analyzes the possibility and economic feasibility of characterizing repos as loans, as separate securities, or as separate purchases and sales of the underlying securities.
Part III concludes that characterizing repo as separate purchases and sales of the underlying securities would best protect repo investors from financial loss and preserve the attractive financial characteristics of repo transactions. Finally,Part IV analyzes the legal consequences of characterizing repos in this manner under the securities laws and the Bankruptcy Code.This analysis reveals that a characterization as separate purchases and sales of the underlying securities would exempt repos from the costly and time-consuming securities laws registration requirements, yet still would protect repo investors under the antifraud provisions of the securities laws. This classification also should yield favorable treatment of repo investors under the Bankruptcy Code. Congress, however, should adopt current proposed amendments to the Bankruptcy Code that will insure the safety and liquidity of the repo market irrespective of which judicial characterization courts apply to repos.
William F. Hagerty, IV,
Lifting the Cloud of Uncertainty Over the Repo Market: Characterization of Repos as Separate Purchases and Sales of Securities,
37 Vanderbilt Law Review
Available at: https://scholarship.law.vanderbilt.edu/vlr/vol37/iss2/5