The bond industry's watchdog group considered the growing use of mortgage-backed and other asset-backed securities in adopting new standards for repurchase agreements - commonly used contracts for short-term lending among investors.
The Public Securities Association said the revised version of its master repurchase agreement reflects a broader use of assets such as mortgage securities in repurchase contracts. Although Treasury issues once dominated the repurchase, or repo, market, "various types of new participants are now involved," a PSA spokesman said. He could not give an estimate of the share that mortgage securities now account for but said these issues are seeing wider use.
The PSA's revision also illustrates the steps being taken to prevent problems from cropping up with any of the securities that are used in repurchase agreements, the spokesman said. "It's a soundness and safety issue for the repo market."
Repurchase agreements are pledges for the sale and repurchase of securities at predetermined prices and times. The agreements give investors flexibility to make large investments with relatively little risk. For example, banks frequently carry large positions of government- and mortgage-backed securities overnight, for inventory or to speculate on market movements. Banks frequently finance these positions with repurchase agreements, instead of making outright purchases. During any given week, $1.6 trillion of repos are outstanding in the U.S. government security market, according to the PSA.
The PSA said its Master Purchase Agreement is a legally binding document that establishes the relationships, rights, and responsibilities of the counterparties in repo transactions.
In amending the agreement for the first time since 1987, the PSA added a number of clauses to address the growing use of assorted securities in the transactions.
The PSA also tightened legal protections by allowing investors to more quickly liquidate their collateral if the counterparty defaults or goes into bankruptcy.
People on the move Wall Street's latest move to beef up coverage of mortgage-backed securities comes from Prudential Securities, which recently hired two analysts for its mortgage bench.
Paul Wang joined the New York investment firm as head of quantitative research from Merrill Lynch & Co., where he was director of financial modeling. Mr. Wang specializes in determining prepayment and default rates. Loy Saguil joined Prudential to oversee fixed income strategies for mortgage-backed securities.
