Repurchase Agreement Interest Rate Risk

2) Under a pension agreement, the Federal Reserve (Fed) buys U.S. Treasury bonds, U.S. agency securities or mortgage-backed securities from a primary trader who agrees to buy them back within one to seven days; an inverted deposit is the opposite. This is how the Fed describes these transactions from the perspective of the counterparty and not from its own point of view. But the Fed was not sure how low the reserves were, and polls last year suggested that reserves would not be scarce until they fell to less than $1.2 trillion. The Fed appears to have miscalculated, in part as a result of the banks` reactions to the Fed polls. It turned out that the banks wanted (or felt forced) to hold more reserves than the Fed had anticipated and were not prepared to borrow those reserves in the pension market, where there were many people with treasuries who wanted to use them as an enpo guarantee for cash. As demand outspaced supply, rest increased sharply. 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. In addition, since the crisis, the Ministry of Finance has kept funds on the Treasury General Account (TGA) from the Federal Reserve and not from private banks. As a result, the Ministry of Finance, when it receives payments, withdraws reserves from the banking system, for example. B corporate tax. The TGA has become more volatile since 2015, reflecting the Finance Department`s decision to withhold only enough money to cover a week of exits. This has made it more difficult for the Fed to estimate demand for reserves. Mr. Robinhood. “What are the near and far legs in a buyout contract?” Access on August 14, 2020. From the buyer`s point of view, a reverse repot is simply the same buyout contract, not the seller`s. Therefore, the seller executing the transaction would call it a “repo,” whereas in the same transaction, the buyer would refer to it as a “reverse repo.” “Repo” and “Reverse repo” are therefore exactly the same type of transaction that is described only from opposite angles.

The term “reverse-repo and sale” is commonly used to describe the creation of a short position on a debt security in which the buyer immediately sells on the open market the guarantee provided by the seller as part of the repurchase transaction. At the time of the count, the buyer acquires the corresponding guarantee on the open market and the pound to the seller.