Although the transaction is similar to a loan and its economic effect is similar to a loan, the terminology is different from that of the loans: the seller legally buys the securities from the buyer at the end of the loan period. However, an essential aspect of rest is that they are legally recognized as a single transaction (important in the event of a counterparty`s insolvency) and not as a transfer and redemption for tax purposes. By structuring the transaction as a sale, a repot provides lenders with significant protection against the normal functioning of U.S. bankruptcy laws, such as. B automatic suspension and prevention of provisions. Like many other corners of finance, retirement operations contain terminology that is not common elsewhere. One of the most common terms in repo space is “leg.” There are different types of legs: for example, the part of the retirement activity that originally sells security is sometimes called “starting leg,” while the subsequent buyback is the “close leg.” These terms are sometimes replaced by “Near Leg” or “Far Leg.” Near a repo transaction, security is sold. In the distant leg, he is redeemed. When a person enters into a reverse buyback agreement, they sign up to give short-term credit to another party (often to a financial institution). The seller may find himself in cash flow problems and needs to find short-term capital. As a result, pension and pension agreements are called secured loans, because a group of securities – usually U.S.
government bonds – insures the short-term credit contract (as collateral). Thus, in financial statements and balance sheets, repurchase agreements are generally recorded as credits in the debt or deficit column. A pension contract (repo) is a short-term guaranteed credit: one party sells securities to another and agrees to buy them back at a higher price at a later price. The securities serve as collateral. The difference between the initial price of the securities and their redemption price is that of the interest paid on the loan called the pension rate. When the desk conducts open market transactions, it sells securities held in the Open Market Account (SOMA) to eligible RRP counterparties with an asset repurchase agreement on the specified RRP due date. As a result, the soma portfolio remains of the same size, as securities sold temporarily in pension transactions continue to be accounted for as SOMA assets in accordance with generally accepted accounting standards, but the transaction defers some of the federal reserve`s debt on deposits (also known as bank reserves) to the withdrawal of deposits while the transactions are outstanding. These RRP operations may apply overnight or for a specified period of time. In the case of a reverse repurchase transaction, the opposite happens: the desk sells securities to a counterparty, subject to a subsequent repurchase agreement of the securities at a higher repurchase price. Reverse pension operations temporarily reduce the amount of reserve balances in the banking system. In a pension agreement, a trader sells securities to a counterparty with the agreement to buy them back at a higher price at a later date.
The trader takes short-term measures at a favourable interest rate with a low risk of loss. The transaction is concluded with a reverse-repo. That is, the counterparty resold them as agreed to the trader. Imagine a pension purchase contract in the form of a loan with collateral securities. For example, a bank sells bonds to another bank and agrees to buy them back at a higher price. An entity may engage in similar activities by offering certificates of deposit, shares and bonds for sale to a bank or other financial institution, with the promise of later repurchase of the guarantee at a higher price.