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31. Do banks that lend through repo receive preferential treatment over other creditors?
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Some commentators have claimed that parties receiving collateral through repos have an unfair priority over other creditors, particularly unsecured creditors, in the event of a default by the collateral-giver. However, this perception is based on the legal form of collateralisation in US repo, where US Treasury and Agency securities are given as collateral through a pledge that is exempt from the provisions of the Bankruptcy Code that normally apply to pledgedcollateral, in particular, the stay on the enforcement of rights to collateral. In Europe and elsewhere, the legal form of a repo involves the outright sale of legal title to collateral. The buyer in a repo therefore has exactly the same rights as someone who has purchased securities in an outright transaction. There is no preference.


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