Bank Repurchase Agreement

The buy-back contract, or “repo,” the market is an opaque but important part of the financial system, which has recently attracted increasing attention. On average, $2 trillion to $4 trillion in pension transactions are traded every day — guaranteed short-term loans. But how does the pension market work, and what about it? In a repo, the investor/lender provides cash to a borrower, the loan being secured by the borrower`s collateral, usually bonds. If the borrower becomes insolvent, the guarantee is granted to the investor/lender. Investors are generally financial enterprises such as money funds, while borrowers are non-intrusive financial institutions, such as investment banks and hedge funds. The investor/lender calculates an interest rate called “pension rate” $X the granting of loans and recovers a higher amount $Y. In addition, the investor/lender may demand guarantees that require a value greater than the amount he lends. This difference is the “haircut.” These concepts are illustrated in the diagram and in the equations section. If investors are at greater risk, they may charge higher pension interest rates and demand higher reductions.

A third party may be involved to facilitate the transaction; In this case, the transaction is called a “tri-party deposit.” [3] In the United States, deposits were already in use in 1917, when war taxes made old forms of credit less attractive. Initially, deposits were only used by the Federal Reserve to lend to other banks, but the practice quickly spread to other market players. The use of rest developed in the 1920s, disappeared due to the Great Depression and World War II, then expanded into the 1950s and grew rapidly in the 1970s and 1980s, thanks in part to computer technology. [6] In 2008, attention was drawn to a form known as Repo 105 after the Collapse of Lehman, since repo 105s would have been used as an accounting device to mask the deterioration of Lehman`s financial health. Another controversial form of buyback order is the “internal repo,” which was first highlighted in 2005. In 2011, it was proposed that, in order to finance risky transactions on European government bonds, Rest could have been the mechanism by which MF Global endangered several hundred million dollars of client funds before its bankruptcy in October 2011. Much of the deposit guarantee is obtained through the re-library of other customer security. [22] [23] Investment bank Lehman Brothers used deposits dubbed “repo 105” and “repo 108” as a creative accounting strategy to support its profitability reports for a few days during the reference season, and incorrectly characterized rest as true sales.