Published on September 17th, 2021 | by Newt Rayburn0
Do Repurchase Agreement
One of the potential costs of a repo transaction is the payment of margins. You must do this if the value of the security decreases before buying it again. The company that holds the security may ask you to pay extra money to compensate for the loss in value. For example, if the security is a loan and the market finds that the loan is no longer worth what it was when you retired, you must make a margin payment to compensate the company to which you sold it. Repo operations are done in three forms: specified delivery, tri-party and retention (the “selling” party holding the guarantee for the duration of the repo). The third form (Hold-in-Custody) is quite rare, especially in development markets, especially because of the risk that the seller will become insolvent before the repo expires and the buyer will not be able to recover the securities that have been reserved as collateral for the transaction. The first form – the specified delivery – requires the delivery of a predefined loan at the beginning and expiry of the contract term. Tri-Party is essentially a form of shopping cart of the transaction and allows for a wider range of instruments in the basket or pool. In the case of a tri-party-repo transaction, an external clearing agent or bank between the “seller” and the buyer is invited. The third party retains control of the securities that are the subject of the contract and processes payments from the “seller” to the “buyer”.
In determining the actual cost and benefits of a repurchase agreement, a buyer or seller wishing to participate in the transaction must take into account three different calculations: the main difference between a maturity and an open repo is the period between the sale and redemption of the securities. A Reverse Repurchase Agreement (Reverse Repo) is the mirror of a repo activity. In a reverse repo, a party buys securities and agrees to sell them later, often the next day, for a positive return. Most rests are overnight, although they may be longer. Since a retirement transaction is a method of selling/buying loans, the seller acts as the borrower and the buyer as the lender. The guarantees relate to the securities sold, which generally come from the government. Repo loans ensure fast liquidity. In case of positive interest, it can be considered that the repurchase price PF is higher than the initial selling price PN. Central counterparties and reverse retirement operations are particularly useful for offsetting temporary fluctuations in bank reserves due to volatile factors such as float, publicly held money, and Treasury deposits with Federal Reserve Banks. 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 repo buyer holds the securities are usually transferred directly to the repo seller. . . .