What Are Repurchase Agreements

For the party that sells security and agrees to buy it back in the future, it is a repo; for the party at the other end of the transaction, the purchase of the warranty and the consent to sell in the future, it is a reverse buyback contract. 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. Under a pension contract, the Federal Reserve (Fed) buys U.S. Treasury bonds, U.S. agency securities or mortgage-backed securities from a primary trader who agrees to buy them back within one to seven days; an inverted deposit is the opposite. This is how the Fed describes these transactions from the perspective of the counterparty and not from its own point of view.

As a result, pension and pension agreements are called secured loans, because a group of securities – usually U.S. government bonds – insures the short-term credit contract (as collateral). Thus, in financial statements and balance sheets, repurchase agreements are generally recorded as credits in the debt or deficit column. 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. The longer the life of the pension, the more likely it is that the value of the security will fluctuate prior to the buyback and that economic activity will affect the supplier`s ability to execute the contract.