Uses Of Repurchase Agreements

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Despite the similarities with secured loans, deposits are actual purchases. However, since the purchaser only temporarily owns the guarantee, these agreements are often considered loans for tax and accounting purposes. In the event of bankruptcy, pension investors can, in most cases, sell their assets. This is another difference between pension credits and secured loans; For most secured loans, bankrupt investors would automatically go bankrupt. Retirement transactions are usually short-term transactions, often literally overnight. However, some contracts are open and do not have a fixed due date, but the reverse transaction is usually done within one year. In general, the credit risk associated with pension transactions depends on many factors, including the terms of the transaction, the liquidity of the security, the specifics of the counterparties concerned and much more. In the United States, standard and reverse agreements are the most commonly used instruments for open operations for the Federal Reserve. We show that retirement operations (rest) are a tool of choice for borrowing in a competitive model with limited commitment. The balanced repurchase agreement provides insurance against fluctuations in the price of assets in countries with high collateral value and maximizes borrowing capacity when it is low. The discounts increase with both counterparty and asset risk. In balance, lenders opt for the reuse of collateral.

This increases the flow of the asset and creates a “collateral multiplier” effect. Finally, we show that intermediation by dealers can form endogenous in balance, with rest chains among distributors. Like many other corners of finance, retirement operations contain terminology that is not common elsewhere. One of the most common terms in repo space is “leg.” There are different types of legs: for example, the part of the retirement activity that originally sells security is sometimes called “starting leg,” while the subsequent buyback is the “close leg.” These terms are sometimes replaced by “Near Leg” or “Far Leg.” Near a repo transaction, security is sold. In the distant leg, he is redeemed. There are mechanisms that are incorporated into the buyback space to reduce this risk.

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