Repurchase Agreements Terms

Pension transactions or central counterparties are essentially short-term loans, which are supported by treasury bills. As a general rule, the duration of a buy-back contract is less than two weeks, with daily counterparties being the instrument of the recurring part of the term. A repurchase transaction can be presented as follows: Company A has unused cash and Company B wants to borrow money overnight to compensate for the necessary reserve deficit it must have with the Federal Reserve. Suppose Company A uses US$10 million to purchase treasury bills from Company B, which agrees to repurchase treasury bills (buy back) the next morning at a price slightly higher than the purchase price of Company A. The higher price paid by Company B is a form of overnight interest on the overnight use of Company A. For example, Company B borrows US$10 million from Company B for the use of the night at certain interest rates (implicitly in the purchase and repurchase prices of Treasury bills). If Company B does not repurchase the Treasury bills held by Company A, the company may sell the imputation to its credit. The transferred treasury bills are therefore used as a guarantee that the lender receives if the borrower does not move the credit. A pension purchase contract (repo) is a form of short-term borrowing for government bond traders. In the case of a repot, a trader sells government bonds to investors, usually overnight, and buys them back the next day at a slightly higher price. This small price difference is the implied day-to-day rate. Deposits are generally used to obtain short-term capital. They are also a common instrument of central bank open market operations.

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. The main difference between a term and an open repo is between the sale and repurchase of the securities. Central banks and banks include long-term pension operations to enable banks to increase their capital reserves. At a later date, the central bank sold the Treasury statement or the government`s paperback to the commercial bank. A sale/buy-back is the cash sale and pre-line repurchase of a security. These are two separate pure elements of the cash market, one for settlement in advance. The futures price is set against the spot price in order to obtain a market return. The basic motivation of Sell/Buybacks is generally the same as in the case of a conventional repo (i.e. the attempt to take advantage of the lower financing rates generally available for secured loans, unlike unsecured loans). The profitability of the transaction is also similar, with interest on the money borrowed from the sale/purchase being implicitly included in the difference between the sale price and the purchase price. Banks and other savings banks with surplus cash often use these instruments because they have shorter maturities than certificates of deposit (CD).

Long-term pension transactions also tend to pay higher interest rates than night pensions because they have a higher interest rate risk, with a duration greater than one day. In addition, collateral risk is higher for appointment deferrals than for overnight deposits, as the value of assets used as collateral is more likely to lose value over an extended period of time.