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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] The distinguishing feature of a tripartite council is that a deposit bank or international clearing organization, tripartite representatives, acts as an intermediary between the two parties to the scheme. The tripartite representative is responsible for managing the transaction, including the allocation of security, market marking and security substitution. In the United States, the two main sorting agents are the Bank of New York Mellon and JP Morgan Chase, while in Europe, the main sorting agents are Euroclear and Clearstream with SIX that offer services in the Swiss market.

The size of the U.S. three-part pension market peaked in 2008 at about $2,800 billion before reaching the worst effects of the crisis, and by mid-2010 it was about $1.6 trillion. [12] Some forms of repo transactions have been highlighted in the financial press due to the technical details of the comparisons that followed the collapse of Refco in 2005. From time to time, a party participating in a repo transaction may not have a specific loan at the end of the repo contract. This can lead to a number of errors from one party to another, as long as different parties have acted for the same underlying instrument. Media attention is focused on attempts to mitigate these errors. In the case of a reverse repurchase transaction, the opposite happens: the desk sells securities to a counterparty, subject to a subsequent repurchase agreement of the securities at a higher repurchase price. Reverse pension operations temporarily reduce the amount of reserve balances in the banking system. The main difference between a term and an open repo is between the sale and repurchase of the securities. The Federal Reserve uses repo and reverse-repo operations to manage interest rates.

In practical terms, it maintains the federal funds rate within the target range set by the Federal Open Market Committee (FOMC). The Federal Reserve Bank of New York conducts the transactions. In India, the Reserve Bank of India (RBI) uses repo and Reverse Repo to increase or reduce the money supply in the economy. The interest rate at which the RBI lends to commercial banks is referred to as “repo”). In the event of inflation, the RBI can increase the pension rate, which prevents banks from lending and reduces the money supply of the economy. [17] From September 2020, RBI rest is set at 4.00% and reverse rest at 3.35%. [18] In the United States, standard and reverse agreements are the most commonly used instruments for open market transactions for the Federal Reserve. The Fed conducts back-and-forth operations with primary traders and other banks, government-subsidized companies and money funds.