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During the life of a repo, the buyer holds legal title to the collateral. In other words, the collateral is his property. He is therefore entitled to any benefits of ownership, including any coupons, dividends or other income that may be paid by the issuer of the collateral.

However, the seller of collateral retains the risk on the collateral, as he has committed to buy it back in the future for its original value plus repo interest (so, if the price falls between selling and buying, the seller will suffer the loss and vice versa). The seller would not accept the risk on the collateral unless he also receives the return, including coupons, dividends or other income. To satisfy the seller, under the ICMA’s Global Master Repurchase Agreement (GMRA), in the case of repurchase transactions, the buyer agrees to immediately pay compensatory amounts to the seller equivalent to any income payment received on the collateral. In the UK, these are called manufactured payments. In the case of buy/sell-backs, the seller is compensated, not by a manufactured payment, but by a reduction in the repurchase price that the seller is required to pay back at maturity.


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