Securities Lending Repurchase And Reverse Repurchase Agreements

Securities lending and pension are part of the broader category of securities financing, as they both facilitate the temporary transfer of securities on a guaranteed basis in exchange for an agreed interest rate, which is run daily. However, the operation of a repo transaction differs from that of a securities lending transaction. In addition, a repurchase agreement is generally governed by a contractual agreement other than a securities loan transaction called the Global Master Repurchase Agreement (GMRA). With respect to securities lending, it is used to temporarily obtain the guarantee for other purposes, for example. B for short position hedging or for use in complex financial structures. Securities are generally borrowed for a royalty, and securities borrowing transactions are subject to other types of legal agreements than deposits. For traders of commercial enterprises, deposits are used to finance long positions, to access cheaper financing costs of other speculative investments and to cover short positions in securities. The main difference for the security holder between a repo transaction and a securities loan transaction is that he pays interest in a repurchase transaction, while he collects interest on a securities loan transaction. In addition, in the context of a repurchase transaction, the owner of the securities is often required to record collateral, while in the case of a securities loan transaction, the holder of the securities often receives guarantees. From the buyer`s point of view, a reverse repot is simply the same buyout contract, not the seller`s. Therefore, the seller executing the transaction would call it a “repo,” whereas in the same transaction, the buyer would refer to it as a “reverse repo.” “Repo” and “Reverse repo” are therefore exactly the same type of transaction that is described only from opposite angles. The term “reverse-repo and sale” is commonly used to describe the creation of a short position on a debt security in which the buyer immediately sells on the open market the guarantee provided by the seller as part of the repurchase transaction. At the time of the count, the buyer acquires the corresponding guarantee on the open market and the pound to the seller.

In the case of such a short transaction, the buyer expects the corresponding warranty to decrease between the rest date and the billing date. According to Yale economist Gary Gorton, the repo has grown to offer large non-depository financial institutions a method of secured lending, consistent with deposit insurance provided by the government in the traditional banking system, with guarantees being a guarantee for the investor. [3] If the Fed wants to tighten the money supply, hungry for liquidity, it sells the bonds to commercial banks through a buy-back contract or a short repot. Subsequently, they will redeem the securities through a reverse repo and re-elect them greedyly in the system. The central bank can increase the total money supply by purchasing government bonds or other government bonds issued by commercial banks.