Repurchase agreements have traditionally served as an alternative form of bridge financing in commodity trading despite its risks. At the Asia Commodity Marketplace, we aim to alleviate concerns by implementing strict protocols, providing a safeguard against potential risks for our buyers and sellers. Additionally, our efforts are geared towards offering enhanced benefits throughout the process.

Repurchase Agreement

A repurchase agreement (repo) functions as a short-term financial arrangement, where one party sells a commodity with a commitment to repurchase it later, utilizing the commodity as collateral. This arrangement offers immediate cash to the seller, enabling the buyer to anticipate gains from potential commodity value appreciation.  

Particularly advantageous for commodity producers, processors, and traders, repos provide short-term funding solutions. In this bilateral agreement, the commodity owner, acting as the seller or borrower, sells it to a buyer or financier at a specified price. Despite the initial sale, the repo operates as a collateralized deposit, effectively mitigating credit risk. The repo rate, representing the return on the cash lent to the seller, reflects the difference between the initial and eventual selling prices.  

The mutual agreement between the borrower (seller) and lender (buyer) establishes transaction terms, covering traded commodities, rates and repurchase prices, maturity date, and financing amount, creating a clear and accountable framework. Commodity repurchase agreements offer flexible financing, providing short-term liquidity for sellers and investment opportunities for buyers. The complex structure, guided by the terms, emphasizes the importance of a reliable collateral management platform.

Repo Risks

Repurchase agreements come with inherent risks. The primary concern in the realm of repo transactions is the potential failure of the seller to fulfill their commitment, known as counterparty risk. Regulatory alterations may impact the agreement by restricting the eligibility of specific commodities as collateral. Market price fluctuations of the collateral commodity pose another risk, potentially resulting in losses for either party. Additionally, the complexity of commodity repurchase agreements can create a lack of transparency, making it challenging for investors to make well-informed decisions.

‍How Repo Works with ACM

ACM aims to expand market participation in commodity repo financing by providing a robust collateral management platform and educating institutional investors. Implementing a rigorous due diligence process, ACM ensures the inclusion of quality sellers and borrowers on the platform.

In the context of commodity repos, the buyer acts as the lender, and the seller as the borrower, with ACCH serving as the central counterparty to maintain transaction integrity. ACM, collaborating with surveyors and warehouse operators, functions as the collateral manager, reducing counterparty risk and fostering a transparent process.

To align the interests of buyers/lenders and sellers/borrowers in repo agreements, ACM oversees the pledged goods. Collaborating with reputable warehouse operators and surveyors, ACM safeguards the collateral, allowing access only to the collateral manager during the repo agreement tenure. The collateral manager also ensures the release of collateral to the original seller upon completion of the repurchase.

Key Components of a Commodity Repurchase Agreement in ACM

Sellers or Borrowers

Members of the Asia Commodity Marketplace who act as sellers or borrowers, such as commodity producers, traders, and processors, are required to have a reputable standing and a demonstrated history of success in the market. These companies must provide ACM with their latest one-year financial statement as an obligation. Additionally, borrowers must explicitly commit to submitting the necessary documentation, recognizing the importance of furnishing the specified documents to the relevant banks.

ACM and ACCH

ACM and ACCH play a pivotal role as a Central Counterparty, facilitating transactions between Seller/Borrowers and Buyer/Lenders. Our responsibility encompasses managing collateral coverage, aligning it meticulously with the maturity of transactions and month-to-month pricing dynamics. To enhance our capabilities, we plan to establish a strategic alliance with a reputable collateral management entity recognized for its exemplary record of accomplishment. Additionally, we will oversee and ensure the integrity of warehouse operations, taking on the responsibility of meticulous supervision. To substantiate the commodities' presence and status within storage facilities, we will uphold warehouse receipts as irrefutable proof. Our commitment extends to thorough assessment procedures and adherence to Know Your Customer (KYC) protocols, ensuring a comprehensive understanding of all parties involved in the transactions.

Collateral

The commodity serves as collateral to secure the funds for the Seller/Borrower, enhancing the agreement between the two parties.

Commodity Repurchase Agreement in ACM

The initial stage of commodity inventory financing is the collateral assessment, which entails evaluating the quality and value of the commodities in the business. This evaluation is crucial in determining the borrowing capacity. After the collateral assessment, the business moves on to formalizing an agreement among the three parties. This agreement thoroughly outlines the terms and conditions governing the financing arrangement. During the financing period, ACM actively oversees the inventory to ensure the consistent quantity and quality of the commodities. This proactive monitoring approach minimizes risks for both parties engaged in the agreement.

Why Asia Commodity Marketplace?

ACM is proud of its thorough procedures for accepting and issuing collateral. We collaborate exclusively with collateral managers and perform mandatory physical inventory inspections, ensuring careful supervision and the security of assets. Additionally, ACM is exploring the implementation of an electronic warehouse receipt system to uphold transaction integrity, prevent duplications, manipulation, and protect against fraudulent activities. Our strict KYC policy guarantees transparency throughout the seller/borrower's supply chain in the repo. In all contracts, we enforce the true sales principle, allowing the exchange to sell the collateral if the seller or borrower fails to repay.

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