PROPOSED LEGAL FRAMEWORK FOR REPO TRANSACTION

Abstract

            The never-ending development in financial industry has one obvious goal to initiate financial product or arrangement that provides not only wider range of accessibility to financial resources but also stronger assurance for the compliance or the remedy in case of incompliance. Generally, financial products should be equipped with cost and time saving qualities as well as reliable risk mitigation approaches. Title finance or title-based financing is a financial arrangement designed to eliminate all these problems. This arrangement offers creditors stronger assurance, since the title of the assets is collateralized in order to put the creditor in a super-priority position. This kind of financing is not new; in fact, it is of the same concept as a well-known sale with the right of redemption, title retention, financial lease, as well as factoring, securitization, and sale and lease-back agreements.

            This article will introduce one interesting transaction constituted as title finance. A repurchase agreement (“repo”) is a transaction in which one party sells its securities to another in exchange for funds with the agreement that the first party will repay the funds with an additional amount in return for the equivalent in securities from the latter. The underlying purpose is not only the ownership of securities, but also the provision of funds with stronger assurance from title ownership. With its underlying nature of formal-less convenience and reliability,  repo constitutes a well-established financial product that is widely used in major financial markets in a variety of developed and developing countries.

            For Thailand, repo was first introduced in 1979 and has continued to be developed from merely monetary policy and liquidity management between the Bank of Thailand and financial institutions, in the structure of bilateral repo, to engagement among private sectors, as known as private repo transactions, which will be focused on this study as one interesting financial sources. However, despite constant improvements, the existing laws and regulations remain inadequate in terms of facilities in the transactions, especially on private repo transactions. The ongoing issues are both legal and policy related. Namely, the issues of dissociated definitions regarding characteristics, withholding tax matters that contradict to the underlying taxation policies, the lack of solid legal certainty that can result in ineffective enforceability, and the need of some operation systems for further improvement.

            This article then provides a comprehensive study on legal approaches towards repo transactions in such leading jurisdictions as the US and EU to compare with Thailand. The analysis has been given on the mechanisms, problems, and varied resolution approaches taken by such jurisdictions to find some recommendable approaches that can possibly adapt to the situation faced in Thailand private repo transaction.

            As a result, this article offers certain suggestions and guidelines to reach appropriate legal framework for private repo transactions in Thailand. Namely, to provide an assurance on validity and protection from recharacterization risk, instead of categorizing the transactions into existing principle of contract laws, repos is proposed to be recognized by its actual character as one form of financial agreement in which the title ownership is transferred to facilitate risk management. Secondly, the proposal is given to consider exempting withholding of certain types of exempted tax for private repo transactions. This tax incentive will eliminate unnecessary procedures and save costs and encourage potential participants to consider a private repo as a wider channel to financial arrangement. Third, in terms of enforcement, considering from one core purpose to create an effective and cost-saving financial arrangement and to mitigate the risks to the minimal level, the law should ensure the enforcement measures either in case of general default or the bankruptcy process, not just by selling out, but also by other practical means agreed, such as close-out or netting. Lastly, the development and improvement of repo transactions requires a great deal of cooperation by all the related parties. The support, both theoretically and practically, such as education for wide range of understanding and supporting systems should be given. The mistakes made and ways of resolving problems can be compared, learned and adopted in order to create sustainable development.