A commodity repurchase agreement (repo) is a financial contract in which one party sells a commodity to another and agrees to repurchase it at a later date. It is a short-term loan in which the commodity acts as collateral. This agreement allows the seller to receive immediate cash while the buyer benefits from the commodity's value appreciation.
Repos provide short-term funding for commodity producers, processors and traders. Lenders, often institutional investors use repos to earn a return on their excess cash.
ACM aims to bring more market participants into the financing side of the commodity repo market by providing a strong collateral management platform and educating more institutional investors about the market. ACM will also have a stringent due diligence process in bringing quality sellers/borrowers to the platform.
The borrower (seller of the commodity) and the lender (buyer of the commodity) agree on the terms of the transaction, including the type of commodities to be traded, the sale and repurchase price which in turn determines the repo rate (interest rate for the agreement), the maturity date (when the commodity will be repurchased), and the financing amount.
Terms and Conditions
The specific commodity being traded and used as collateral.
The initial price at which the commodity is sold and the repurchase price.
The length of the repurchase agreement, typically ranging from overnight to several weeks.
The interest rate charged on the funds being lent during the duration of the repo agreement. It is determined by market conditions, the creditworthiness of the borrower, the volatility of the price of the underlying commodity as well as the investment objectives of the lender.
The risk that one party may default on the agreement, leading to potential losses for the other party.
Terms and Conditions
In commodity repos, the purchaser takes on the role of the lender, whilst the seller assumes that of the borrower. ACCH acts as the central counterparty to both parties and ACM, working with our network of surveyors and warehouse operators, acts as the collateral manager to the trade, mitigating counterparty risk and ensuring that the physical transaction is a fair and transparent process. To align the interests of buyers and sellers in the repo agreement, ACM acts as the Collateral Manager in relation to the underlying commodity. By assessing the value and quality of the commodities held, ACM will determine the borrowing capacities of the producers.
ACM, by working with reputable warehouse operators and surveyors, ensures that the collateral can only be accessed by the collateral manager during the tenure of the repo agreement. Throughout the financing period, the lender monitors the inventory to ensure its value and quality are maintained, minimizing risk for both parties. The collateral manager will also ensure that the underlying commodity is released back to the original seller when the repurchase has occurred.
The specific commodity being traded and used as collateral.
Changes in the market price of the commodity used as collateral can lead to losses for either party.
Changes in regulations can impact the terms of the agreement or limit the use of certain commodities as collateral.
The lack of transparency around the complex transactions involved in commodity repurchase agreements can make it difficult for investors to make informed decisions.
Commodity repurchase agreements offer a flexible financing solution for both sellers and buyers, providing short-term liquidity and investment opportunities respectively. The intricate structure of these agreements, governed by terms such as commodity type, pricing, repo rate, duration, and counterparty risk, underscores the need for a reliable collateral management platform.
ACM, by serving as the central counterparty and collateral manager, not only mitigates counterparty risk but also ensures transparency and fairness in the physical transaction process.
