Essentially a secured loan, a repo is a kind of securities financing transaction. In some markets, it is also called a sales and repurchase contract. The main use of the Repo is the registration and loan of cash. Pension transactions are generally considered safe investments, as the security in question serves as collateral, which is why most agreements involve U.S. Treasury bonds. Considered an instrument of the money market, a pension purchase contract is indeed a short-term loan, guaranteed by security and an interest rate. The buyer acts as a short-term lender, the seller as a short-term borrower. The securities sold are the guarantees. This will help achieve the objectives of both parties, namely the guarantee of financing and liquidity.
Once the actual interest rate is calculated, a comparison between the interest rate and other types of financing will show whether the pension contract is a good deal or not. In general, pension transactions offer better terms than money market cash loan agreements as a secure form of lending. From a reseat participant`s perspective, the agreement can also generate additional revenue from excess cash reserves. There are built-in mechanisms in the buy-back room 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. Borrowers and lenders include pension transactions that exchange cash for debt in order to raise short-term capital.
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, insolvent investors would remain automatic. Pension transactions are generally considered to be instruments for controlling 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.