How Do Repo Agreements Work

For the party who sells the security and agrees to buy it back in the future, it is a repo; For the party at the other end of the transaction, which buys the security and agrees to sell in the future, this is a reverse retirement transaction. From the buyer`s point of view, a reverse repo is simply the same pension activity, not that of the seller. Therefore, the seller who carries out the transaction would qualify it as a „repo“, while in the same transaction, the buyer would qualify it as a „reverse repo“. „Repo“ and „Reverse Repo“ are therefore exactly the same type of transaction that is only described from opposite angles. The term „reverse repo et sale“ is generally used to describe the creation of a short position in a debt instrument in which the buyer immediately sells on the open market the assets provided by the seller. On the date of execution of the repo, the buyer acquires the corresponding title on the open market and delivers it to the seller. In the case of a transaction of this type, the buyer expects the security in question to lose its value between the date of the repo and the date of settlement. Therefore, repurchase agreements and reverse-pension agreements are called secured loans, given that a group of securities – most often US Treasury bonds – insures the short-term credit agreement (as collateral for). Thus, in financial statements and balance sheets, pension agreements are generally recorded as credits in the debt or deficit column. When public central banks buy securities from private banks, they do so at a reduced interest rate called the repo rate. Like policy rates, repo rates are set by central banks.

The repo interest rate system allows governments to control the money supply within economies by increasing or reducing available resources. A cut in repo rates encourages banks to sell securities for cash to the government. This increases the money supply available to the general economy. Conversely, by raising repo rates, central banks can effectively reduce the money supply by preventing banks from reselling these securities. Beginning in late 2008, the Fed and other regulators established new rules to address these and other concerns. The impact of these rules has been increased pressure on banks to maintain their safest assets, such as Treasuries. According to Bloomberg, the impact of the regulation has been significant: at the end of 2008, the estimated value of global securities borrowed in this way was nearly $4 trillion. But since then, that figure has approached $2 trillion. In addition, the Fed has increasingly entered into retreat operations (or reverse retirement operations) in order to compensate for temporary fluctuations in bank reserves. . .

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