Understanding Repurchase Agreements

There are three main types of retirement operations. A pension transaction is when buyers buy securities from the seller for cash and agree to cancel the transaction on a given date. It works as a short-term secured loan. The main difference between a term and an open repo is between the sale and repurchase of the securities. With respect to securities lending, it is used to temporarily obtain the guarantee for other purposes, for example. B for short position hedging or for use in complex financial structures. Securities are generally borrowed for a royalty, and securities borrowing transactions are subject to other types of legal agreements than deposits. The cash paid on the initial sale of securities and the money paid at the time of the repurchase depend on the value and type of security associated with the pension. In the case of a loan. B, both values must take into account the own price and the value of the interest accrued on the loan. A reverse buyback contract (Reverse repo) is the mirror of a repo transaction. In a reverse, a party buys securities and agrees to resell them later, often the next day, for a positive return.

Most deposits are overnight, although they may be longer. In general, the credit risk associated with pension transactions depends on many factors, including the terms of the transaction, the liquidity of the security, the specifics of the counterparties concerned and much more. Deposits with longer tenors are generally considered riskier. Over a longer period of time, there are more factors that can affect the solvency of the supplier and changes in interest rates have a greater impact on the value of the asset repurchased. There are mechanisms that are insinuated in the possibility of buyback agreements to reduce this risk. For example, many depots are over-secure. In many cases, a margin call may take effect to ask the borrower to change the securities offered when the security loses value. In situations where the value of the guarantee is likely to increase and the creditor cannot resell it to the borrower, subsecured protection can be used to reduce risk. While conventional repositories are generally less valued instruments in terms of credit risk, there are residual credit risks. Although this is essentially a guaranteed transaction, the seller may not buy back the securities sold on the due date. In other words, the pension seller does not fulfill his obligation.

Therefore, the buyer can keep the warranty and liquidate the guarantee to recover the borrowed money. However, security may have lost value since the beginning of the operation, as security is subject to market movements. To reduce this risk, deposits are often over-insured and subject to a daily market margin (i.e., if the guarantee ends in value, a margin call may be triggered to ask the borrower to reserve additional securities). Conversely, if the value of the guarantee increases, there is a credit risk to the borrower, since the lender is not allowed to resell it. If this is considered a risk, the borrower can negotiate a subsecured repot. [6] An open repurchase agreement (also known as “one request repo”) works in the same way as a terminology board, except that the trader and counterparty accept the transaction without setting the maturity date.