Focusnet.net
Fill out form to get a quote
Repurchase Agreements or REPOS
The term repo stands for
sale and repurchase agreement and is similar to a secured loan.
One party agrees to sell securities, for example bonds or gilts, to the
other and receives collateral in cash to secure the loan. At the same time
the parties agree to repurchase an equivalent or equal securities at a
specific price in the future. At that point the securities are returned to
the borrower and the lender returns the collateral. The cost of this secured
finance is given by the difference between the sale and repurchase priceo of
these bonds and is known as a the repo rate.
A reverse repo is simply the same repurchase agreement from
a buyers point viewpont, and not the sellers. In other words, the seller
executing the transaction would describe it as a repo, while the buyer in
the same transaction would describe it as a reverse repo. So repo and
reverse repo are exactly the same kind of transaction, just described from
opposite viewpoints.
The purpose of the repo market as implemented by central banks such as the
bank of England and the European Central Bank, is to provide or take away
liquidity from the money market. In a repo transaction there are two
parties. The repo participant agrees to initially sell and then buyback
instruments, the reverse repo participant is the other side of the
transaction that agrees to initially buy and then sell the instruments at a
later date.
The central bank will use these instruments to influence the money supply,
it will enter into repo agreements as the reverse repo participant and with
other money market institutions such as the banks being the repo
participant. So therefore as the reverse participant the central bank will
provide the collateral provided under the repo.
If the central bank wishes to drain liquidity from the money markets then it
will use repo transactions. This time the central bank will be the repo
player initially selling instruments and therefore withdrawing cash from the
system.
A Tri-Party Repos
A Tri-party repo is a custodian bank or clearing bank or clearing
organization that acts as an intermediary between two parties to the
repurchase or repo agreement outlined above.