Why Do Banks Do Repurchase Agreements

كتب - آخر تحديث - 21 ديسمبر 2020

A pension contract (repo) is a short-term guaranteed credit: one party sells securities to another and agrees to buy them back at a higher price at a later price. The securities serve as collateral. The difference between the initial price of the securities and their redemption price is that of the interest paid on the loan called the pension rate. Many investment banks, such as Bear Stearns and Lehman Brothers, relied too much on cash from short-term deposits to finance their long-term investments. When too many lenders claimed their debts at the same time, it was like an old-fashioned bank race. A pension contract is a sale of securities for cash, with the obligation to buy back the securities at a predetermined price at a predetermined price, according to the borrower. A lender, such as a bank. B, will enter into a repurchase agreement for the purchase of fixed-rate securities from a lending counterparty, for example. B of a trader, with the promise of the resale of the securities within a short period of time. At the end of the term of the contract, the borrower repays the interest-plus money to a deposit to the lender and repays the securities. 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 short, for retirement operations, the retirement market is a complex but important sector of the U.S.

financial system, where companies act every day for billions of dollars for cash. Activities in this market keep the wheels of Wall Street and the wider economy. 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. Mr. Robinhood. “What are the near and far legs in a buyout contract?” Access on August 14, 2020. A sale/buy-back is the cash sale and pre-line repurchase of a security. These are two separate pure elements of the cash market, one for settlement in advance.

The futures price is set against the spot price in order to obtain a market return. The basic motivation of Sell/Buybacks is generally the same as in the case of a conventional repo (i.e. the attempt to take advantage of the lower financing rates generally available for secured loans, unlike unsecured loans). The profitability of the transaction is also similar, with interest on the money borrowed from the sale/purchase being implicitly included in the difference between the sale price and the purchase price. In 2007-08, a rush to the renudisument market, where investment bank financing was either unavailable or at very high interest rates, was a key aspect of the subprime mortgage crisis that led to the Great Recession. [3] Once the real interest rate is calculated, a comparison between the interest rate and other types of financing will show whether the pension contract is a good deal or not. In general, pension transactions offer better terms than money market cash loan agreements as a secure form of lending.