Reverse Repurchase Agreement (Repo)

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. In the case of a reverse repurchase agreement, the opposite happens: the desk sells securities to a counterparty subject to a repurchase agreement at a later date at a higher redemption price. Reverse charge operations temporarily reduce the amount of reserve assets in the banking system. While conventional deposits are generally credit risk instruments, there are residual credit risks. Although it is essentially a secured transaction, the seller can no longer redeem the securities sold on the maturity date. In other words, the repo seller is no longer in default in his commitment. Therefore, the buyer can keep the guarantee and liquidate the guarantee to recover the money loaned. However, the security may have lost its value since the beginning of the transaction, as the security is subject to market movements.

In order to reduce this risk, deposits are often over-undersured and are subject to a daily market margin (i.e. if assets lose value, a margin call can be triggered to ask the borrower to publish additional securities). Conversely, when the value of the security increases, the borrower runs a credit risk, since the creditor is not allowed to resell them. If this is considered a risk, the borrower can negotiate a subsecured repo. [6] Reverse retirement transactions (RRPs) are the end of a repo transaction. These instruments are also called secured loans, buy/sell back loans and sell/buy back loans. When repo transactions are settled by the Federal Open Market Committee of the Federal Reserve as part of open market operations, repo transactions add reserves to the banking system and then withdraw them after a certain period of time; Reverse-rests first remove reserves and then add them again. This instrument can also be used to stabilize interest rates and the Federal Reserve has used it to adjust the federal funds rate to the target rate. [16] Although the transaction is similar to a loan and its economic impact is similar to a loan, the terminology is different from that of credits: the seller legally buys the securities from the buyer at the end of the loan period.

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