Quick Find:
23. Who can exercise the voting rights and corporate actions attached to equity and corporate bonds being used as collateral in a repo?
<<< Previous page     Next page >>>



During the life of a repo, the buyer holds legal title to the collateral. In other words, the collateral is his property and he is entitled to any benefits of ownership. In the case of equity, and sometimes corporate bonds, the benefits of ownership may include voting rights. The buyer can, if he wishes, vote in accordance with the wishes of the seller but he is under no obligation whatsoever to do so. However, while the buyer obtains any rights to vote that are attached to collateral securities, it is unacceptable under corporate governance recommendations to use repo to buy securities solely in order to exercise the voting rights given that the repo buyer is only a short-term holder of those securities.

In the case of equity and sometimes corporate bonds, options may arise such as rights issues and stock splits --- so-called corporate actions --- on which holders are required to make a choice. As with voting rights, under the ICMA’s Global Master Repurchase Agreement (GMRA), the decision about how the corporate action is exercised with regard to a security provided as collateral rests entirely with the buyer, as he is the owner (assuming the buyer is still holding the security when a decision has to be made). However, who should take the decision, after a corporate action, about which security is to be delivered back to the seller at the end of the repo (called the Equivalent Securities in the GMRA)? This is not expressly stated in the GMRA. On the one hand, it could be argued that the GMRA should be consistent with the Equity Annex, which expressly allocates the decision to the seller, as does the Global Master Securities Lending Agreement (GMSLA). In addition, one of the economic principles underlying a repo is that only the seller should be exposed to the risk and return on the collateral, which implies that the seller should decide how to respond to a corporate action. On the other hand, it can be argued that the securities to be returned at the end of a repo, like the securities delivered at the start, should always be agreed between the parties, so the buyer should be consulted.


Back to Frequently Asked Questions on Repo contents page

 
<<< Previous page     Next page >>>