CFM17185 - Repos: commercial background: manufactured payments

How manufactured payments arise

Manufactured payments normally arise under repos where the transaction crosses an interest or dividend date, so that the interim holder, instead of the original owner, receives the interest or dividend as the registered owner of the security. See CFM17300+ for the tax treatment of manufactured payments.

You can see from the example at CFM17170a that the substance of a normal repo is a secured loan, with the original owner retaining all risks and rewards of owning the “collateral”, and paying interest on the cash received from the initial sale in the form of a price differential. Consequently, if the interim holder receives dividends or interest during the repo period, it will normally be required to make corresponding “manufactured payments” to the original owner

Alternatively there may be no provision for manufactured payments to be made but the repurchase price may be correspondingly reduced to take account of the fact that the original owner has not received the dividend or interest. This type of repo is known as a net paying repo and described in detail at CFM17190. This may also happen in a sell/buyback where the interest or dividend payment is known at the outset.