Like many other corners of the financial world, repurchase agreements include terminology that is not common elsewhere. One of the most common terms in the repo space is “leg”. There are different types of legs: for example, the part of the buyback agreement in which the security is originally sold is sometimes referred to as the “starting leg”, while the redemption part that follows is the “narrow part”. These terms are sometimes exchanged for “near leg” or “distant leg”. In the vicinity of a repurchase transaction, the security is sold. In the back leg, he is redeemed. Repo agreements are often referred to briefly as pensions. However, they should not be confused with another type of pension that means repossession, e.B. that of a physical asset that supports a loan, e.B. an automobile.
Once the actual interest rate is calculated, a comparison of the interest rate with those of other types of financing will show whether the repurchase agreement is a good deal or not. In general, repurchase agreements, as a safe form of lending, offer better terms than cash lending operations on the money market. From the perspective of a reverse reverse repurchase agreement participant, the agreement may also generate additional income from excess cash reserves. The affected securities are usually U.S. Treasuries, which provide the collateral for the loan. If for some reason the seller cannot buy them back, the buyer can easily sell them on the open market. As a result, repurchase agreements backed by government bonds are considered very safe and are therefore an inexpensive way for institutions to borrow money in the short term. An open repo contract (also known as an on-demand pension) works in the same way as a term pension, except that the merchant and the counterparty agree on the transaction without setting the maturity date. On the contrary, the negotiation can be terminated by both parties by informing the other party before an agreed daily deadline. If an open deposit is not terminated, it is automatically renewed every day.
Interest is paid monthly and the interest rate is regularly reassessed by mutual agreement. The interest rate on an open deposit is usually close to the federal funds rate. An open deposit is used to invest money or fund assets when the parties don`t know how long it will take them to do so. But almost all open contracts are concluded within a year or two. To determine the actual costs and benefits of a reverse repurchase agreement, a buyer or seller interested in participating in the transaction must consider three different calculations: Since an annuity agreement is a sale/redemption of the loan, the seller acts as the borrower and the buyer acts as the lender. The guarantee refers to the securities sold, which usually come from the government. Repo loans ensure fast liquidity. Pensions with longer maturities are generally considered a higher risk. In the longer term, more factors can affect the creditworthiness of the returner, and changes in interest rates are more likely to affect the value of the asset repurchased. When state central banks buy securities back from private banks, they do so at a reduced interest rate known as the reverse repurchase rate.
Like key interest rates, repo rates are set by central banks. The repo rate system allows governments to control the money supply in economies by increasing or decreasing the funds available. Lower repo rates encourage banks to sell securities to the government for money. This increases the amount of money available to the economy in general. Conversely, by raising repo rates, central banks can effectively reduce the money supply by discouraging banks from reselling these securities. The main difference between a term and an open repurchase agreement is the time lag between the sale and redemption of the securities. There are three main types of reverse repurchase agreements. The same principle applies to rest. The longer the duration of the repurchase agreement, the more likely it is that the value of the guarantee will fluctuate before the redemption and that the business activity will affect the redemption`s ability to perform the contract.