New Purchased Securities

“New Purchased Securities” are really just securities which have been substituted for the original “Purchased Securities” under Paragraph 8 (“Substitution”) of the GMRA.

In other words, if you were to regard a Repurchase Transaction as economically equivalent to a loan, “New Purchased Securities” are really nothing more than substitute collateral provided in relation to the ‘loan’.

Why might a party wish to substitute securities transferred under a Repurchase Transaction?   There are a number of reasons.  For example:

1. The price may have risen and the ‘original owner’ may just wish to sell them and bank a profit.
2. The ‘original owner’ may be obliged to deliver them to another counterparty.
3. The ‘original owner’ may want to exercise voting rights associated with those securities.
4. The ‘original owner’ may wish to get securities back over an “Income Payment Date” so as to avoid any tax issues that may be associated with a manufactured payment to be made by its counterparty.

The GMRA makes clear that at any time between the “Purchase Date” and the “Repurchase Date”, the Seller may request a substitution in relation to the Purchased Securities it originally delivered.  The Buyer (in other words, the ‘lender’) has to agree to this substitution.  If the Buyer does agree, it is under an obligation to return securities equivalent to the Purchased Securities (and not the actual Purchased Securities).  For its part, the Seller is under an obligation to transfer securities of a description as are agreed between the parties and in an amount which is no less than the market value of the securities returned by the Buyer.  These securities which are provided by the seller in substitution for the original “Purchased Securities” are called “New Purchased Securities”.

So, substitution is possible, but consent of the Buyer is required.  This makes perfect sense as, after all, the securities do belong to the Buyer.

Any substitution must be effected by the simultaneous transfer of Equivalent Securities by the Buyer for New Purchased Securities by the Seller.  Once the transfer of substitute securities has been completed, the underlying Transaction will continue as if the original Purchased Securities has just comprised the “New Purchased Securities” which have just been provided in substitution.

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