Reverse Repo Agreement Meaning

A reverse repurchase agreement or « Reverse Repo » is the purchase of securities with the agreement to sell them at a higher price on a given future date. For the party who sells the security (and agrees to buy it back in the future), it is a retirement transaction (PR) or repo; For the party at the other end of the transaction (purchase of the security and acceptance of the sale in the future), this is a Reverse Repurchase Agreement (RRP) or reverse repo. An entire loan pension is a form of repo in which the transaction is secured by a loan or other form of commitment (for example. B mortgages) and not by a security. In 2008, attention was drawn to a form known as the Repo 105 after the collapse of Lehman, since it was alleged that the Repo 105s was being used as an accounting sleight of hand to conceal the deterioration in Lehman`s financial health. Another controversial form of buyback order is the « internal repo », first known in 2005. In 2011, it was proposed that the rest periods used to finance risky trades in European government bonds may have been the mechanism by which MF Global put at risk several hundred million dollars of client money before its bankruptcy in October 2011. A large part of the rest guarantee would have been obtained through the seizure of other customer security rights. [22] [23] The term repo has given rise to many misunderstandings: there are two types of transactions with identical cash flows: as a result, repurchase agreements and reverse repurchase agreements are called secured loans, given that a group of securities – most often US Treasury bonds – insures the short-term credit agreement (as collateral for). Thus, in financial statements and balance sheets, pension agreements are generally recorded as credits in the debt or deficit column. The credit risk associated with repo is subject to many factors: maturity of the repo, liquidity of the security, strength of the counterparties concerned, etc. While the purpose of the repo is to borrow money, it is not technically a loan: ownership of the securities in question actually comes and goes between the parties involved. However, these are very short-term transactions with a guarantee of redemption.

In particular, Party B acts as a cash lender in a repo, while Seller A acts as a cash borrower and uses the collateral as collateral; in a reverse repo (A), is the lender and (B) the borrower. A repo is economically similar to a secured loan in which the buyer (effectively the lender or investor) receives securities as collateral in order to guard against the seller`s default. The party who first sold the securities is effectively the borrower. Many types of institutional investors participate in repo operations, including investment funds and hedge funds. [5] Almost all securities can be used in a repo, although highly liquid securities are preferred because they are easier to sell in the event of default and, more importantly, they can be easily bought on the open market, where the buyer has created a short position in the repo security through a reverse-repo and a sale in the market. For the same reason, illiquid securities are discouraged…

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