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Are Repurchase Agreements Cash Equivalents

In case of positive interest, it can be considered that the repurchase price PF is higher than the initial selling price PN. For the buyer, a repo is an opportunity to invest cash for a certain period of time (other investments usually limit the duration). It is short-term and safer than the guaranteed investment, because the investor receives guarantees. Market liquidity for deposits is good and prices are competitive for investors. Money Funds are major buyers of retirement operations. 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] There are a number of differences between the two structures. A repo is technically a one-time transaction, while a sell/buy is a pair of transactions (a sale and a buy). The sale/redemption does not require specific legal documents, whereas a repo usually requires a framework contract between the buyer and the seller (usually the Global Master Repo Agreement (GMRA) ordered by SIFMA/ICMA). For this reason, an increase in risk compared to repo is associated. In the event of default by the counterparty, the absence of an agreement may reduce the legal position on the recovery of collateral. Any coupon payment on the underlying security during the term of the sale/redemption is generally returned to the purchaser of the security by adjusting the cash paid at the end of the sale/redemption. In a repo, the voucher is immediately sent to the security seller. As part of a repo agreement, the Federal Reserve (Fed) buys U.S. Treasury bonds, securities from U.S. authorities or mortgage securities from a primary trader who agrees to buy them back generally within one to seven days. An inverted repo is the opposite. Therefore, the Fed describes these transactions from the counterparty`s perspective and not from its own perspective.

Among the criteria for the authorisation of guarantees, the criteria for the authorisation of collateral may include the type of assets, issuer, currency, domicile, credit quality, duration, index, size of issues, average volume of daily trading, etc. Both the lender (repo buyer) and the borrower (cash seller) make these transactions in order to avoid the administrative burden of bilateral deposits. As collateral is held by an agent, counterparty risk is reduced. A tripartite repo can be considered the result of the „Due Bill Repo“. A Due Bill Repo is a repo in which collateral is held by the cash borrower and not delivered to the cash provider. There is a higher element of risk compared to tri-party repo, as the guarantee of a bill deposit due is held in a customer deposit with the borrower in cash and not in a guarantee account with a neutral third party. . .