What Serves As Collateral In A Repurchase Agreement

But the Fed was not sure how low the reserves were, and polls last year suggested that reserves would not be scarce until they fell to less than $1.2 trillion. The Fed appears to have miscalculated, in part as a result of the banks` reactions to the Fed polls. It turned out that the banks wanted (or felt forced) to hold more reserves than the Fed had anticipated and were not prepared to borrow those reserves in the pension market, where there were many people with treasuries who wanted to use them as an enpo guarantee for cash. As demand outspaced supply, rest increased sharply. There are mechanisms built into the possibility of buyback agreements to reduce this risk. For example, many depots are over-secure. In many cases, a margin call may take effect to ask the borrower to change the securities offered when the security loses value. In situations where the value of the guarantee is likely to increase and the creditor cannot resell it to the borrower, subsecured protection can be used to reduce risk. An open repurchase agreement (also called repo on demand) works in the same way as a “term-repo” except that the trader and counterparty accept the transaction without setting the due date. On the contrary, trade can be terminated by both parties by notifying the other party before an agreed daily period. If an open deposit is not completed, it is automatically crushed every day. Interest is paid monthly and the interest rate is reassessed by mutual agreement at regular intervals.

The interest rate on an open pension is generally close to the federal rate. An open repo is used to invest cash or finance assets if the parties do not know how long it will take them. But almost all open contracts are concluded in one to two years. The main resting objective is to finance the purchase of securities by government bond traders until they can be sold to customers. These are private trades for which there are no public offerings. For example, because the U.S. Treasury sells its securities at auction, merchants must bid by indicating price and quantity and paying for successful bids up to the settlement date. However, the merchant cannot have all the money on the billing date, so if a merchant successfully bids for $1 billion, the merchant can pay $100,000,000 on the billing date and finance the rest through the Treasury provided they are redeemed after the merchant has received payment from his customers. Since the trader sells more securities, another portion of the guarantees are repurchased by the Treasury for the offer price, plus the interest accrued on the security, plus the interest charged by the Ministry of Finance for the maintenance of the inventory.

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