Money in exchange for securities. What do repo transactions mean and why are they important for Latvia?

Repo transactions are financial transactions where a buyer and seller are twice involved in a bilateral exchange of money and securities. The origin of the term ‘repo’ come from the Latin verb ‘reportare’ (to bring back, to return), and its meaning is close to the saying ‘I gain by returning’.

This transaction is used for a variety of purposes, such as to obtain a loan against securities collateral or to obtain securities to continue speculating. It is often used by financial institutions (banks, large investment funds, on the interbank market) as well as by banks in transactions with clients.

The value of transactions on foreign markets are huge. For example, in June 2022, the European repo market reached approximately 9,680.3 billion EUR, while the US market was worth 2,480 billion USD. Simultaneously, the repo market’s potential is hardly used in Latvia. In the fourth quarter of 2022, only 28 transactions were concluded in Latvia for a total of 2,184 million EUR. The use of repos in state commerce is an indicator that a country's economy has reached a certain level of development. Successful economic development cannot be achieved without improving the legal system and eliminating legal uncertainty.

The regulation of repo transactions as civil law contracts is not uniform across Europe. In some countries, such as Latvia, Estonia, and Lithuania, repo transactions are known but not separately regulated. In Lithuania, they are considered a sale with the right of redemption, while in Malta they are regarded as a sale with a promise to repurchase. In Latvia, Estonia, Hungary, and Poland, they are treated as repurchase agreements. In French, German, and Italian law, on the other hand, repo is regulated as a stand-alone type of transaction in the law. 

Although there are numerous economic studies on financial transaction issues, there are almost no legal studies, resulting in a lack of a fundamental basis for regulatory development. Certain areas remain untouched for centuries. The doctoral thesis by Rīga Stradiņš University (RSU) PhD student Tatjana Jukna was compiled over seven years. It comprises more than 20 years of practical experience gained at the largest Latvian credit institutions where she specialised in financial and capital market transactions. 

One of the aims of this PhD thesis was to build a theoretical basis for the civil law aspects of repo transactions, as this is the first legal research in the history of Latvia, and possibly also in Lithuania and Estonia.

To meet the aim of the study, the author has examined more than 500 sources in 11 languages, including books from the 17th and 18th century, 110 legislative acts, 45 court judgment and 21 framework agreements that have been or are used in Latvian financial institutions.

The research data allows her to conclude that Latvian repo agreements do not have a uniform approach to the transaction and to the interpretation of the civil law consequences of the transaction. For example, the approach used by 23.08% of the total number of market participants surveyed, is the result of a lack of knowledge. The approach to the transfer of ownership, etc. also differs.

It should be noted that Jukna’s PhD thesis provides a theoretical basis not only for repo transactions but also for the development of other sui generis civil law transactions used in financial markets, which share similarities with the structure or methods of repo transactions. Among these are foreign exchange market swap transactions (SWAP) and non-deliverable forwards (NDF), which use the transfer method (novation).

RSU dissertation database