Been going through some topic tests and have seen these two answers provided in answer keys which seem to be conflicting.
Repo rates will reflect the delivery requirement, with (all else being equal) the lowest rates provided for physical delivery, the next lowest for wire transfer of title, the next for delivery to a custodial account, and the highest for no delivery
There are a variety of mechanisms for transferring the securities to the buyer. For example, a custodial bank can take possession of the securities and ensure that both parties’ interests are served. This transaction tends to have a lower cost than other transfer arrangements.
These two answers seems to very conflicting with regard to delivery requirements. The first is very specific so I am guess I will follow that template but the second begs the question what other delivery arrangements can there be outside of wire transfer or physical delivery?
Also, can someone expand to me the different between physical delivery and wire or custodial? I mean we are talking about financial instruments here, everything is electronic today this is not like a physical delivery for a commodity such as wheat or lean hogs.
The second bullet point describes a portion of the first bullet point (custodial). When it says lower cost in the second bullet point, it means lower cost of delivery/transaction of transferring not lower repo rate.
Also, it certainly could mean delivery of 1,000,000 head of cattle, that would get you a lower repo rate than just transferring the title to the cattle to the counterparty, however your transaction cost to load up the cattle into your truck and deliver it to the bank would be astronomical.
Ya sorry I dont think I described the situation correctly. This is from the Top Test - Chung Q2.
The problem states that an advisor places client assets used in these repurchase agreements in a custodial account at our bank, rather than using a wire transfer of title. This delivery method results in lower delivery charges and lower repo rates.
However, I have seen two answers from CFA per the below
Repo rates will reflect the delivery requirement, with (all else being equal) the lowest rates provided for physical delivery, the next lowest for wire transfer of title, the next for delivery to a custodial account, and the highest for no delivery
There are a variety of mechanisms for transferring the securities to the buyer. For example, a custodial bank can take possession of the securities and ensure that both parties’ interests are served. This transaction tends to have a lower cost than other transfer arrangements.
Bullet point answer number 2 seems to be conflicted with the answer in number 1 in that the bullet point one is suggesting custodial is the 3rd most expensive in terms of transaction costs, however bullet point 2 seems to suggest that custodial delivery tends to have a lower cost than other transfer arrangements.
What other transfer arrangements are there besides physical delivery, wire of title, and custodial?
Also again the second question i have is what is the different in terms of a physical delivery vs. say a wire transfer of title for a financial instrument which is not physically tangible. I don’t believe physical certificates are in circulation anymore if that’s what is being contemplated here.
cheapest = 3rd party custodian (i.e. euroclear/clearstream)
2nd cheapest is you have a safekeeping account with the repo bank, they then transfer the securities to repo account and block the position. the actual custodian is irrelevant.
3rd cheapest, you instruct your custodian to assign the securities to the repo party.
then some other custoday account (4 party repo)
most expensive is you block the securities in your own system