Beginning in late 2008, the Fed and other regulators adopted new rules to address these and other concerns. One consequence of these rules was to increase pressure on banks to maintain their safest assets, such as Treasuries. They are encouraged not to borrow them through boarding agreements. According to Bloomberg, the impact of the regulation was significant: at the end of 2008, the estimated value of the world securities borrowed was nearly $4 trillion. But since then, that number has been close to $2 trillion. In addition, the Fed has increasingly entered into pension (or self-repurchase) agreements to compensate for temporary fluctuations in bank reserves. In general, two counterparties will enter into an agreement in a repurchase transaction, under which one of the securities will be sold to the other, while being repurchased at a fixed price at a specified later date. The securities can therefore indeed be considered as a guarantee for a cash loan. The securities concerned are generally fixed income securities and pricing is agreed in the form of interest rates. This agreed interest rate is called the pension rate. While many market participants conduct such transactions, it is usually only with certain banks in their domestic money markets, which are implemented in the short term, with the aim of implementing monetary policy.
Despite the similarities with secured loans, deposits are actual purchases. However, since the purchaser only temporarily owns the guarantee, these agreements are often considered loans for tax and accounting purposes. In the event of bankruptcy, pension investors can, in most cases, sell their assets. This is another difference between pension credits and secured loans; For most secured loans, bankrupt investors would automatically go bankrupt. “What are the near and far legs in a buyout contract?” Access on August 14, 2020. There are mechanisms built into the possibility of buyback agreements to reduce this risk. For example, many depots are over-secure. In many cases, a margin call may take effect to ask the borrower to change the securities offered when the security loses value. In situations where the value of the guarantee is likely to increase and the creditor cannot resell it to the borrower, subsecured protection can be used to reduce risk. From the seller`s point of view, we are talking about repo: sale followed by withdrawal, from the buyer`s point of view, we are talking about reverse repo: purchase followed by resale. The University of Manhattan. “Buyout Contracts and the Law: How Legislative Amendments Fueled the Housing Bubble,” page 3.
Access on August 14, 2020. Treasury or government bills, corporate and treasury bonds and equities can all be used as “guarantees” in a renuvene transaction. However, unlike a secured loan, the right to securities is transferred from the seller to the buyer. Coupons (interest payable to the owner of the securities) that mature while the pension buyer owns the securities are usually passed directly on the seller of securities. This may seem counter-intuitive, given that the legal ownership of the guarantees during the pension agreement belongs to the purchaser. Rather, the agreement could provide that the buyer will receive the coupon, with the money to be paid in the event of a buyback being adjusted as compensation, although this is rather typical of the sale/buyback. In 2008, attention was drawn to a form known as Repo 105 after the Collapse of Lehman, since Repo 105s would have been used as an accounting ploy to mask the deterioration of Lehman`s financial health.