Unlike classic repo transactions where the underlying security is in the form of government or corporate bonds, equity repos are based on equity securities such as common shares. The equity repo market is relatively a new one. In the past, equity repo was not imaginable because fixed income securities were considered the safest form of repo collateral, but with the debacle of the structured products market and the emergence of modern markets, banks and other market participants have started searching for new types of repo collateral (including equity), especially those seeking to expand their financing bases and alternatives.
Equity repo provides a peculiar advantage over fixed-income repo: its transparent pricing and risk disaggregation. It is typically used to finance long equity positions and to borrow equity securities to cover short positions. If the life of an equity repo encompasses an ex-dividend date, the cash lender will be required to compensate the borrower of the amount of dividend paid on that date.
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