So we know that a Repo Trade is basically a repurchase agreement used against assets, typically against listed securities. Who funds this transaction and why is very important for any client to find out as there are some whose goals are counter to the client’s goals.
When someone buys a stock, they are said to be going Long, meaning they are purchasing with the hope that the shares will increase in value. The opposite, to Short, is when shares are borrowed and sold hoping the price decreases in value and the shares can be bought back at a lower price to close the transaction. An example, shares are borrowed and sold at 25 and bought back to close out at 20 meaning a 5 point profit per share for the short.
The bulk of the firms that offer this program, commonly referred to as a Stock Loan Program, are funded by Private Equity groups or Hedge Funds. Often their purpose is to take the shares in order to short them or to cover existing short positions. So what? What that really means is they are lending against the client’s shares hoping to give them back at the end of the loan period at a lower value or nearly as bad, to sell to cover an existing position. That somehow doesn’t seem right.
If you are considering one of these stock loan programs, ask the general question of who funds it? Here at Southern Lending Solutions, we are fortunate in that we have a top global reinsurer that funds our Securities Lending Program. The difference is the shares allow our reinsurer to write more reinsurance, their primary line of business. It also means that as the shares increase in value, they can write even more reinsurance and gain as our clients gain and if the shares decrease in value, they share in the loss with the client as it means they cannot write as much reinsurance. Our reinsurer’s goals are in line with our client’s goals.
We know (and you should too) that no one who makes a loan to our clients does so without knowing they can make $$ from doing so but at least if our funders and our clients goals are properly aligned with each other then everyone stands to gain from the transaction.
Stu
