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. In the case of a repo transaction, the desk acquires cash, agency debt or mortgage securities (MBS) from a counterparty subject to a securities resale agreement at a later date. It is economically similar to that of a credit that is protected by securities whose value is higher than credit, in order to protect the desk against market and credit risks. Repo operations temporarily increase the amount of reserve assets in the banking system. 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. A repurchase agreement (PR) is a short-term loan in which both parties agree to the sale and future redemption of assets within a specified period of time. The seller sells a Treasury bill or other government security guard with the promise to buy it back at some point and at a price that includes an interest payment. There are mechanisms built into the buyback space to reduce this risk. For example, a lot of rest is over-guaranteed. In many cases, if the collateral loses value, a margin call may take effect to ask the borrower to change the securities offered. In situations where it seems likely that the value of the security may increase and the creditor may not resell it to the borrower, the subsecure may be used to mitigate the risks.
Repo transactions allow a security to be sold to another party with the promise that it will be redeemed at a later date at a higher price. The buyer also earns interest. Although the transaction is similar to a loan and its economic impact is similar to a credit, the terminology differs from that of credit: the seller legally buys the securities from the buyer at the end of the loan period. However, one of the essential aspects of rest is that they are legally recognised as a single transaction (significant in the event of the insolvency of the counterparty) and not as an assignment and redemption for tax purposes. By structuring the transaction as a sale, a repo offers lenders considerable protection against the normal operation of U.S. bankruptcy laws, such as. B automatic suspension and avoidance provisions. For securities lending, the temporary obtaining of the security is intended for other purposes, such as.B. hedging short positions or intended for use in complex financial structures. .