The Risk Of Repurchase Agreement

Despite the similarities with secured loans, deposits are real purchases. However, since the buyer has only temporary ownership of the collateral, these agreements are often treated as loans for tax and accounting purposes. In the event of insolvency, investors can sell their assets in most cases. This is an additional distinction between repo credits and secured loans; For most secured loans, bankrupt investors would be subject to automatic suspension. These are two separate direct spot market transactions, one for futures settlement. The futures price is set in relation to the spot price in order to obtain a return on the market. The fundamental motivation for sales/redemptions is usually the same as for a classic repo (i.e.: The attempt to take advantage of the lower funding rates generally available for secured loans compared to unsecured loans). The profitability of the operation is also similar, with the interest on the money borrowed by the sale/redemption implicitly in the difference between the sale price and the purchase price. Treasury or government bills, corporate and treasury/government bonds, and shares can all be used as “collateral” in a repo transaction. However, unlike a secured loan, the right to securities passes from the seller to the buyer.

Coupons (interest to be paid to the owner of the securities) due while the buyer in repo holds the securities are usually directly passed on to the seller in repo. This may seem counterintuitive, given that the legal ownership of the security rights during the pension contract belongs to the buyer. Instead, the agreement could provide that the buyer will receive the coupon, adjusting the cash to be paid during the redemption in order to compensate for this, although this is more typical of sales/redemptions. 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. The short answer is yes – but there are significant differences of opinion about the importance of the factor. Banks and their lobbyists tend to say that the rules were a bigger cause of the problems than the policymakers who put the new rules in place after the 2007-9 global financial crisis. The intent of the rules was to ensure that banks have sufficient capital and liquidity that can be sold quickly in case of difficulties. . .

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