Under a long-term repurchase agreement (Term Repo), a bank will accept the purchase of securities from a trader and resell them to the merchant shortly thereafter, at a predetermined price. The difference between feed-in and sale prices represents the implied interest paid for the agreement. By purchasing these securities, the central bank is helping to stimulate the money supply in the economy, which encourages spending and reduces the cost of credit. If the central bank wants the economy to grow, it first sells the government bonds and then buys them back on an agreed date. In this case, the agreement is called the reverse reference contract. Central banks and banks include long-term pension operations to enable banks to increase their capital reserves. At a later date, the central bank sold the Treasury statement or the government`s paperback to the commercial bank. 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. Reposatz is the cost of buying back the securities by the seller or lender. The interest rate is a simple interest rate, which uses a real/360 timetable and represents the cost of borrowing on the pension market. For example, a seller or borrower may be forced to pay a 10% higher price in the event of a buyback.
Beginning in late 2008, the Fed and other regulators adopted new rules to address these and other concerns. One consequence of these rules was to increase pressure on banks to maintain their safest assets, such as Treasuries. They are encouraged not to borrow them through boarding agreements. According to Bloomberg, the impact of the regulation was significant: at the end of 2008, the estimated value of the world securities borrowed was nearly $4 trillion. But since then, that number has been close to $2 trillion. In addition, the Fed has increasingly entered into repurchase (or self-reversion) agreements to compensate for temporary fluctuations in bank reserves. «Buyout Contracts and the Law: How Legislative Amendments Fueled the Housing Bubble,» page 3. Access on August 14, 2020.
Although the transaction is similar to a loan and its economic effect is similar to a loan, the terminology is different from that of the loans: the seller legally buys the securities from the buyer at the end of the loan period. However, an essential aspect of rest is that they are legally recognized as a single transaction (important in the event of a counterparty`s insolvency) and not as a transfer and redemption for tax purposes. By structuring the transaction as a sale, a repot provides lenders with significant protection against the normal functioning of U.S. bankruptcy laws, such as. B automatic suspension and prevention of provisions.