Why Use Repo Agreements

Pension transactions are generally considered to be a reduction in credit risk. The biggest risk in a repo is that the seller does not maintain his contract by not repuring the securities he sold on the due date. In these cases, the purchaser of the guarantee can then liquidate the guarantee in an attempt to recover the money he originally paid. However, the reason this is an inherent risk is that the value of the warranty may have decreased since the first sale and therefore cannot leave the buyer with any choice but to maintain the security he never wanted to maintain in the long term, or to sell it for a loss. On the other hand, this transaction also poses a risk to the borrower; If the value of the guarantee increases beyond the agreed terms, the creditor cannot resell the guarantee. The crisis has revealed problems with the pension market in general. Since then, the Fed has intervened to analyze and reduce systemic risks. The Fed has identified at least three problematic areas: the Fed has also conducted daily and long-term repurchase operations. Given the tightness of short-term interest rates, the volatility of the repo market may spread slightly at the key rate.

The Fed can take direct action to keep the key rate within its target range by proposing its own renu possibly resealing operations at the Fed`s target rate. When the Fed first intervened in September 2019, it was offering at least $75 billion a week in daily rest and $35 billion in long-term rean already. Subsequently, it increased the volume of its daily loans to $120 billion and reduced its long-term lending. But the Fed has indicated that it intends to carry out the intervention: Federal Reserve Vice President Richard Clarida said, “It may be appropriate to phase out reseat operations this year” as the Fed increases the money supply in the system by buying Treasury bills. The Federal Reserve began in 2013 with the issuance of Reverse Rest as a test program. This involved the purchase of long-term bank securities under the Quantitative Easing (QE) program. QE added huge amounts of credit to the financial markets to combat the 2008 financial crisis. The Fed could use reverse rest to make adjustments in the securities market in the short term. Deposits with a specified maturity date (usually the next day or the following week) are long-term repurchase contracts. A trader sells securities to a counterparty with the agreement that he will buy them back at a higher price at a given time. In this agreement, the counterparty receives the use of the securities for the duration of the transaction and receives interest that is indicated as the difference between the initial selling price and the purchase price.

The interest rate is set and interest is paid at maturity by the trader. A Repo term is used to invest cash or to finance assets when the parties know how long it will take them. The Federal Reserve uses repurchase and pension 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.

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