Repurchase Reverse Agreement
In the case of a repurchase transaction, the Desk acquires cash, agency or mortgage-backed securities (MbS) from a counterparty, subject to a subsequent resale agreement. It is economically akin to a loan secured by securities with a value greater than the loan, in order to protect the desk from market and credit risks. Reseat operations temporarily increase the amount of reserve balances in the banking system. There is also a risk that the securities in question will depreciate before the due date, in which case the lender may lose money during the transaction. This time risk is the reason why the shortest buyback transactions have the most favourable returns. Repo is a form of guaranteed loan. A basket of securities serves as an underlying guarantee for the loan. Securities law is transferred from the seller to the buyer and returns to the original owner after the contract is concluded. The most commonly used guarantees in this market are U.S. Treasury bonds. However, government bonds, agency securities, mortgage-backed securities, corporate bonds or even shares can be used in a repurchase transaction. While a pension purchase contract involves a sale of assets, it is considered a loan for tax and accounting purposes. 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. The reverse repot is a guarantee for the lender of funds that finance themselves with a short-term investment amount, and thus creates a security borrowing door to obtain certain short positions covered. It is generally intended to control the supply of money to the economy as a whole. They are also considered safer, as they are primarily self-inted. When the desk conducts open market transactions, it sells securities held in the Open Market Account (SOMA) to eligible RRP counterparties with an asset repurchase agreement on the specified RRP due date. As a result, the soma portfolio remains of the same size, as securities sold temporarily in pension transactions continue to be accounted for as SOMA assets in accordance with generally accepted accounting standards, but the transaction defers some of the federal reserve`s debt on deposits (also known as bank reserves) to the withdrawal of deposits while the transactions are outstanding.