The repo rate is the cost of the repurchase of the securities by the seller or lender. The interest rate is a simple interest rate that uses a 360 calendar and represents the cost of borrowing in the repo market. For example, a seller or borrower may have to pay a 10% higher price at the time of redemption. Deposits with a given maturity date (usually the next day or week) are long-term retirement operations. A trader sells securities to a counterparty with the agreement that he buys them back at a higher price at a given time. In this agreement, the counterparty receives the use of the securities during the term of the transaction and receives interest which is expressed as the difference between the initial sale price and the redemption price. The interest rate is set and the interest is paid at maturity by the merchant. A term repo is used to invest cash or financial assets when the parties know how long it takes them. The cash paid at the first sale of securities and the money paid at the time of redemption depend on the value and nature of the security participating in the repo.
In the case of a loan, for example, both values must take into account the own price and the value of the interest accrued on the loan. The same principle applies to Repos. The longer the duration of the repo, the more likely it is that the value of the guarantees will vary before the redemption and that the activity will affect the buyer`s ability to honour the contract. In fact, counterparties` credit risk is the primary risk of rest. As with any loan, the creditor bears the risk that the debtor will not be able to repay the principal. Deposits act as a secured debt, which reduces the overall risk. And since the repo price exceeds the value of the guarantees, these agreements remain mutually beneficial for buyers and sellers. An overnight repo is an agreement for which the duration of the loan is one day. On the other hand, maturity buyback contracts can last up to one year, with the majority of deposits with a maturity of less than or more than three months.
However, it is not uncommon to see Term Repos lasting up to two years. Manhattan College. “Retirement Operations and the Law: How Legislative Changes Fueled the Housing Bubble,” page 3. Called August 14, 2020. Treasury or government bills, corporate and treasury/government bonds, and stocks can all be used as “collateral” in a repo transaction. However, unlike a secured loan, the right to securities passes from the seller to the buyer. Coupons (interest to be paid to the owner of the securities) due while the buyer in repo holds the securities are usually directly passed on to the seller in repo. This may seem counterintuitive, given that the legal ownership of the security rights during the pension contract belongs to the buyer.
Instead, the agreement could provide that the buyer will receive the coupon, adjusting the cash to be paid during the redemption in order to compensate for this, although this is more typical of sales/redemptions. Retirement operations have developed to a very large extent in money markets, which is driving the growth of short-term markets for investment funds in the trading of government-backed securities, such as T-Bills. Indeed, through its banking system, the Federal Reserve Treasury is a large rest buyer and provides significant liquidity to short-term market traders. Although the transaction is similar to a loan and its economic impact is similar to that of a loan, the terminology differs from that of credits: the seller legally buys the securities from the buyer at the end of the loan period….