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89-434: A repurchase agreement , also known as a repo , RP , or sale and repurchase agreement , is a form of short-term borrowing, mainly in government securities . The dealer sells the underlying security to investors and, by agreement between the two parties, buys them back shortly afterwards, usually the following day, at a slightly higher price. The repo market is an important source of funds for large financial institutions in

178-543: A "debt brake" in Germany and Switzerland ; and the European Union 's Stability and Growth Pact agreement to maintain a general government gross debt of no more than 60% of GDP. The ability of government to issue debt has been central to state formation and to state building . Public debt has been linked to the rise of democracy , private financial markets , and modern economic growth . For example, in

267-519: A lender of cash to security sellers who effectively borrow cash at interest (the repo rate ), with the security they sell serving as collateral , a reverse repo facility is a security-selling party allowing buyers with cash to effectively lend it to the facility at interest with the security they purchase serving as collateral. An example is a bank with cash deposits who loans it to a reverse repo facility to earn interest on it and contribute to their own collateral requirements (as deposit banks) with

356-465: A run on the repo market, in which funding for investment banks was either unavailable or at very high interest rates, was a key aspect of the subprime mortgage crisis that led to the Great Recession . In July 2011, concerns arose among bankers and the financial press that if the 2011 U.S. debt ceiling crisis led to a default, it could cause considerable disruption to the repo market. This

445-497: A court is called a judgment creditor . The term creditor derives from the notion of credit . Also, in modern America, credit refers to a rating which indicates the likelihood a borrower will pay back their loan . In earlier times, credit also referred to reputation or trustworthiness . In accounting presentation, creditors are to be broken down into 'amounts falling due within one year' or 'amounts falling due after more than one year'... The financial statements presentation

534-401: A fee and securities lending trades are governed by different types of legal agreements than repos. Repos have traditionally been used as a form of collateralized loan and have been treated as such for tax purposes. Modern Repo agreements, however, often allow the cash lender to sell the security provided as collateral and substitute an identical security at repurchase. A reverse repo is simply

623-502: A general rule, the GFSM says debt should be valued at market value , the value at which the asset could be exchanged for cash. However, the nominal value is useful for a debt-issuing government, as it is the amount that the debtor owes to the creditor. If market and nominal values are not available, face value (the undiscounted amount of principal to be repaid at maturity) is used. A country's general government debt-to-GDP ratio

712-477: A government would need to raise taxes or reduce spending, which would exacerbate the negative event. While government borrowing may be desirable at times, a "deficits bias" can arise when there is disagreement among groups in society over government spending. To counter deficit bias, many countries have adopted balanced budget rules or restrictions on government debt. Examples include the "debt anchor" in Sweden;

801-406: A government's balance sheet , but they are not included in government debt because they are not contractual obligations. Indeed, it is not uncommon for governments to change unilaterally the benefit structure of social security schemes, for example (e.g., by changing the circumstances under which the benefits become payable, or the amount of the benefit). In the U.S. and in many countries, there

890-426: A lot of misunderstanding: there are two types of transactions with identical cash flows: The sole difference is that in (i) the asset is sold (and later re-purchased), whereas in (ii) the asset is instead pledged as a collateral for a loan: in the sell-and-buy-back transaction , the ownership and possession of S are transferred at t N from a A to B and in t F transferred back from B to A ; conversely, in

979-405: A method of secured lending analogous to the depository insurance provided by the government in traditional banking, with the collateral acting as the guarantee for the investor. In 1982, the failure of Drysdale Government Securities led to a loss of $ 285 million for Chase Manhattan Bank . This resulted in a change in how accrued interest is used in calculating the value of the repo securities. In

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1068-423: A more risk averse repo buyer may wish to only hold "on-the-run" government bonds as collateral. In the event of a liquidation event of the repo seller the collateral is highly liquid thus enabling the repo buyer to sell the collateral quickly. A less risk averse repo buyer may be prepared to take non investment grade bonds or equities as collateral, which may be less liquid and may suffer a higher price volatility in

1157-745: A result of the 2007–2008 financial crisis . But, by mid-2010, the market had largely recovered and, at least in Europe, had grown to exceed its pre-crisis peak. A repurchase agreement is a transaction concluded on a deal date t D between two parties A and B : If positive interest rates are assumed, the repurchase price P F can be expected to be greater than the original sale price P N . The (time-adjusted) difference P F − P N P N ⋅ 365 t F − t N {\textstyle {\frac {P_{F}-P_{N}}{P_{N}}}\cdot {\frac {365}{t_{F}-t_{N}}}}

1246-508: A right to levy against a particular piece of property, or against the debtor's accounts in general, the rules governing creditors' rights determine which creditor has the strongest right to any particular relief. Generally, creditors can be divided between those who " perfected " their interest by establishing an appropriate public record of the debt and any property claimed as collateral for it, and those who have not. Creditors may also be classed according to whether they are "in possession" of

1335-601: A rising interest rate, which can crowd out private investment as governments compete with private firms for limited investment funds. Some evidence suggests growth rates are lower for countries with government debt greater than around 80 percent of GDP. A World Bank Group report that analyzed debt levels of 100 developed and developing countries from 1980 to 2008 found that debt-to-GDP ratios above 77% for developed countries (64% for developing countries) reduced future annual economic growth by 0.017 (0.02 for developing countries) percentage points for each percentage point of debt above

1424-472: A safe and liquid investment, it could be used as collateral for private loans. This created a complementarity between the development of public debt markets and private financial markets. Government borrowing to finance public goods, such as urban infrastructure, has been associated with modern economic growth . Written records point to public borrowing as long as two thousand years ago when Greek city-states such as Syracuse borrowed from their citizens. But

1513-482: A security. The underlying security for many repo transactions is in the form of government or corporate bonds. Equity repos are simply repos on equity securities such as common (or ordinary) shares. Some complications can arise because of greater complexity in the tax rules for dividends as opposed to coupons. A sell/buyback is the spot sale and a forward repurchase of a security. It is two distinct outright cash market trades, one for forward settlement. The forward price

1602-544: A series of technical factors that had limited the supply of funds available. In a repo, the investor/lender provides cash to a borrower, with the loan secured by the collateral of the borrower, typically bonds. In the event the borrower defaults, the investor/lender gets the collateral. Investors are typically financial entities such as money market mutual funds, while borrowers are non-depository financial institutions such as investment banks and hedge funds. The investor/lender charges interest (the repo rate ), which together with

1691-405: Is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption (usually enforced by contract ) that the second party will return an equivalent property and service. The second party

1780-414: Is an indicator of its debt burden since GDP measures the value of goods and services produced by an economy during a period (usually a year). As well, debt measured as a percentage of GDP facilitates comparisons across countries of different size. The OECD views the general government debt-to-GDP ratio as a key indicator of the sustainability of government finance. An important reason governments borrow

1869-463: Is because the beneficiaries of the government's expenditure on goods and services when the debt is created typically differ from the individuals responsible for repaying the debt in the future. An alternative view of government debt, sometimes called the Ricardian equivalence proposition, is that government debt has no impact on the economy if individuals are altruistic and internalize the impact of

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1958-470: Is called the repo rate , which is the annualized interest rate of the transaction. P F − P N P N ⋅ t F − t N 365 {\textstyle {\frac {P_{F}-P_{N}}{P_{N}}}\cdot {\frac {t_{F}-t_{N}}{365}}} can be interpreted as the interest rate for the period between near date and far date . The term repo has given rise to

2047-440: Is frequently called a debtor or borrower . The first party is called the creditor, which is the lender of property, service, or money. Creditors can be broadly divided into two categories: secured and unsecured . The term creditor is frequently used in the financial world, especially in reference to short-term loans , long-term bonds , and mortgage loans . In law, a person who has a money judgment entered in their favor by

2136-464: Is issued in a country's own fiat money , it is sometimes considered risk free because the debt and interest can be repaid by money creation . However, not all governments issue their own currency. Examples include sub-national governments, like municipal, provincial, and state governments; and countries in the eurozone . In the Greek government-debt crisis , one proposed solution was for Greece to leave

2225-411: Is more typical of sell/buybacks. Further, the investor/lender may demand collateral of greater value than the amount that they lend. This difference is the "haircut." These concepts are illustrated in the diagram and in the equations section. When investors perceive greater risks, they may charge higher repo rates and demand greater haircuts. Whereas a repo facility is a security-buying party acting as

2314-432: Is no money earmarked for future social insurance payments — the system is called a pay-as-you-go scheme. According to the 2018 annual reports from the trustees for the U.S. Social Security and Medicare trust funds, Medicare is facing a $ 37 trillion unfunded liability over the next 75 years, and Social Security is facing a $ 13 trillion unfunded liability over the same time frame. Neither of these amounts are included in

2403-401: Is set at 4.00% and the reverse repo rate at 3.35%. The investment bank Lehman Brothers used repos nicknamed "repo 105" and "repo 108" as a creative accounting strategy to bolster their profitability reports for a few days during reporting season, and mis-classified the repos as true sales. New York attorney general Andrew Cuomo alleged that this practice was fraudulent and happened under

2492-421: Is set relative to the spot price to yield a market rate of return. The basic motivation of sell/buybacks is generally the same as for a classic repo (i.e., attempting to benefit from the lower financing rates generally available for collateralized as opposed to non-secured borrowing). The economics of the transaction are also similar, with the interest on the cash borrowed through the sell/buyback being implicit in

2581-406: Is this: Creditors' rights are the procedural provisions designed to protect the ability of creditors—persons who are owed money—to collect the money that they are owed. These provisions vary from one jurisdiction to another, and may include the ability of a creditor to put a lien on a debtor's property, to effect a seizure and forced sale of the debtor's property, to effect a garnishment of

2670-408: Is to act as an economic "shock absorber". For example, deficit financing can be used to maintain government services during a recession when tax revenues fall and expenses rise for say unemployment benefits. Government debt created to cover costs from major shock events can be particularly beneficial. Such events would include In the absence of debt financing, when revenues decline during a downturn,

2759-428: Is transacted in the U.S. repo markets. In 2007–2008, a run on the repo market, in which funding for investment banks was either unavailable or at very high interest rates, was a key aspect of the subprime mortgage crisis that led to the Great Recession . During September 2019, the U.S. Federal Reserve intervened in the role of investor to provide funds in the repo markets, when overnight lending rates jumped due to

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2848-563: The Federal Reserve to lend to other banks, but the practice soon spread to other market participants. The use of repos expanded in the 1920s, fell away through the Great Depression and WWII, then expanded once again in the 1950s, enjoying rapid growth in the 1970s and 1980s in part due to computer technology. According to Yale economist Gary Gorton , repo evolved to provide large non-depository financial institutions with

2937-506: The Latin American debt crisis of the early 1980s, and Argentina's debt crisis in 2001 . To help avoid a crisis, governments may want to maintain a "fiscal breathing space". Historical experience shows that room to double the level of government debt when needed is an approximate guide. Government debt is built up by borrowing when expenditure exceeds revenue, so government debt generally creates an intergenerational transfer. This

3026-451: The non-depository banking sector, which has grown to rival the traditional depository banking sector in size. Large institutional investors such as money market mutual funds lend money to financial institutions such as investment banks , either in exchange for (or secured by) collateral , such as Treasury bonds and mortgage-backed securities held by the borrower financial institutions. An estimated $ 1 trillion per day in collateral value

3115-404: The "selling" party holds the security during the term of the repo). The third form (hold-in-custody) is quite rare, particularly in developing markets, primarily due to the risk that the seller will become insolvent prior to maturation of the repo and the buyer will be unable to recover the securities that were posted as collateral to secure the transaction. The first form—specified delivery—requires

3204-491: The 17th and 18th centuries England established a parliament that included creditors, as part of a larger coalition, whose authorization had to be secured for the country to borrow or raise taxes. This institution improved England's ability to borrow because lenders were more willing to hold the debt of a state with democratic institutions that would support debt repayment, versus a state where the monarch could not be compelled to repay debt. As public debt came to be recognized as

3293-486: The 1920s Weimar Germany suffered from hyperinflation when the government used money creation to pay off the national debt following World War I . While U.S. Treasury bonds denominated in U.S. dollars may be considered risk-free to an American purchaser, a foreign investor bears the risk of a fall in the value of the U.S. dollar relative to their home currency. A government can issue debt in foreign currency to eliminate exchange rate risk for foreign lenders, but that means

3382-566: The 1970s , a bailout came from New York State and the United States national government. U.S. state and local government debt is substantial — in 2016 their debt amounted to $ 3 trillion, plus another $ 5 trillion in unfunded liabilities. A country that issues its own currency may be at low risk of default in local currency, but if a central bank provides finance by buying government bonds (sometimes referred to as debt monetization ), this can lead to price inflation . In an extreme case, in

3471-525: The Federal Reserve has used it to adjust the federal funds rate to match the target rate . Under a repurchase agreement, the Federal Reserve (Fed) buys U.S. Treasury securities , U.S. agency securities , or mortgage-backed securities from a primary dealer who agrees to buy them back within typically one to seven days; a reverse repo is the opposite. Thus, the Fed describes these transactions from

3560-539: The Insolvency Practitioner and readily accept annual reports when submitted. Under the Companies Act 2006 , a company's creditors may apply to the court for an order summoning a meeting of the creditors or some of the creditors who fall into a specific category, in order to consider a compromise or " arrangement " between the company and its creditors. If a majority representing 75% in value of

3649-462: The SIFMA/ICMA commissioned Global Master Repo Agreement (GMRA)). For this reason, there is an associated increase in risk compared to repo. Should the counterparty default, the lack of agreement may lessen legal standing in retrieving collateral. Any coupon payment on the underlying security during the life of the sell/buyback will generally be passed back to the buyer of the security by adjusting

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3738-543: The U.S. gross general government debt , which in 2024 was $ 34 trillion. In 2010 the European Commission required EU Member Countries to publish their debt information in standardized methodology, explicitly including debts that were previously hidden in a number of ways to satisfy minimum requirements on local (national) and European ( Stability and Growth Pact ) level. Government finance: Specific: General: Lender A creditor or lender

3827-671: The United Kingdom (£628,978,782); on a per-capita basis, the highest-debt countries were New Zealand (£58 12s. per person), the Australian colonies (£52 13s.) and Portugal (£35). In 2018, global government debt reached the equivalent of $ 66 trillion, or about 80% of global GDP, and by 2020, global government debt reached $ 87US trillion, or 99% of global GDP. The COVID-19 pandemic caused public debt to soar in 2020, particularly in advanced economies that put in place sweeping fiscal measures. Government debt accumulation may lead to

3916-520: The administration of the transaction, including collateral allocation, marking to market , and substitution of collateral. In the US, the two principal tri-party agents are The Bank of New York Mellon and JP Morgan Chase , whilst in Europe the principal tri-party agents are Euroclear and Clearstream with SIX offering services in the Swiss market. The size of the US tri-party repo market peaked in 2008 before

4005-405: The agreement and processes the payments from the "seller" to the "buyer." In a due bill repo , the collateral pledged by the (cash) borrower is not actually delivered to the cash lender. Rather, it is placed in an internal account ("held in custody") by the borrower, for the lender, throughout the duration of the trade. This has become less common as the repo market has grown, particularly owing to

4094-500: The area of creditor's rights perform one or all of the following: In the UK, once an Individual Voluntary Arrangement (IVA) has been applied for, and is in place through the courts, creditors are prevented from making direct contact under the terms of the IVA. All ongoing correspondence of an IVA must first go through the appointed Insolvency Practitioner . The creditors will begin to deal with

4183-413: The borrowing government then bears the exchange rate risk. Also, by issuing debt in foreign currency, a country cannot erode the value of the debt by means of inflation. Almost 70% of all debt in a sample of developing countries from 1979 through 2006 was denominated in U.S. dollars. Most governments have contingent liabilities , which are obligations that do not arise unless a particular event occurs in

4272-421: The buyer has created a short position in the repo security by a reverse repo and market sale; by the same token, non liquid securities are discouraged. Treasury or Government bills, corporate and Treasury/Government bonds, and stocks may all be used as "collateral" in a repo transaction. Unlike a secured loan, however, legal title to the securities passes from the seller to the buyer. Coupons (interest payable to

4361-405: The cash paid at the termination of the sell/buyback. In a repo, the coupon will be passed on immediately to the seller of the security. A buy/sell back is the equivalent of a "reverse repo". In securities lending , the purpose is to temporarily obtain the security for other purposes, such as covering short positions or for use in complex financial structures. Securities are generally lent out for

4450-465: The cash provider. There is an increased element of risk when compared to the tri-party repo as collateral on a due bill repo is held within a client custody account at the Cash Borrower rather than a collateral account at a neutral third party. A whole loan repo is a form of repo where the transaction is collateralized by a loan or other form of obligation (e.g., mortgage receivables) rather than

4539-404: The collateral they obtain in the transaction. In a tri-party repo , a third party facilitates elements of the transaction, typically custody, escrow, monitoring, and other services. The following table summarizes the terminology: In the United States, repos have been used from as early as 1917 when wartime taxes made older forms of lending less attractive. At first, repos were used just by

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4628-447: The collateral, and by whether the debt was created as a purchase money security interest . A creditor may generally ask a court to set aside a fraudulent conveyance designed to move the debtor's property or funds out of their reach. Some lawyers have a specialized practice area focused on the collection of such debts . Such attorneys are frequently referred to as collection attorneys or collection lawyers. Attorneys who practice in

4717-440: The collateralized borrowing, only the possession is temporarily transferred to B whereas the ownership remains with A . There are two types of repo maturities: term , and open repo . Term refers to a repo with a specified end date: although repos are typically short-term (a few days), it is not unusual to see repos with a maturity as long as two years. Open has no end date which has been fixed at conclusion. Depending on

4806-399: The contract, the maturity is either set until the next business day and the repo matures unless one party renews it for a variable number of business days. Alternatively it has no maturity date – but one or both parties have the option to terminate the transaction within a pre-agreed time frame. Repo transactions occur in three forms: specified delivery, tri-party, and held in custody (wherein

4895-464: The counterparty's viewpoint rather than from their own viewpoint. If the Federal Reserve is one of the transacting parties, the RP is called a "system repo", but if they are trading on behalf of a customer (e.g., a foreign central bank), it is called a "customer repo". Until 2003, the Fed did not use the term "reverse repo"—which it believed implied that it was borrowing money (counter to its charter)—but used

4984-402: The creation of a short position in a debt instrument where the buyer in the repo transaction immediately sells the security provided by the seller on the open market. On the settlement date of the repo, the buyer acquires the relevant security on the open market and delivers it to the seller. In such a short transaction, the buyer is wagering that the relevant security will decline in value between

5073-406: The creation of centralized counterparties. Due to the high risk to the cash lender, these are generally only transacted with large, financially stable institutions. The distinguishing feature of a tri-party repo is that a custodian bank or international clearing organization , the tri-party agent, acts as an intermediary between the two parties to the repo. The tri-party agent is responsible for

5162-455: The creditors or class of creditors present and voting either in person or by proxy at the meeting agree a compromise, the meeting may apply to the court for the compromise to be enforced. The same provision would apply to members ( shareholders ) of a company seeking to make an arrangement with the company. The Corporate Insolvency and Governance Act 2020 makes similar provision where a compromise has been proposed between creditors or members and

5251-485: The date of the repo and the settlement date. For the buyer, a repo is an opportunity to invest cash for a customized period of time (other investments typically limit tenures). It is short-term and safer as a secured investment since the investor receives collateral. Market liquidity for repos is good, and rates are competitive for investors. Money Funds are large buyers of Repurchase Agreements. For traders in trading firms, repos are used to finance long positions (in

5340-458: The debt on future generations. According to this proposition, while the quantity of government purchases affects the economy, debt financing will have the same impact as tax financing because with debt financing individuals will anticipate the future taxes needed to repay the debt, and so increase their saving and bequests by the amount of government debt. Such higher individual saving means, for example, that private consumption falls one-for-one with

5429-443: The debtor's wages, and to have certain purchases or gifts made by the debtor set aside as fraudulent conveyances . The rights of a particular creditor usually depend in part on the reason for which the debt is owed, and the terms of any writing memorializing the debt. Creditors' rights deal not only with the rights of creditors against the debtor, but also with the rights of creditors against one another. Where multiple creditors claim

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5518-411: The delivery of a prespecified bond at the onset, and at maturity of the contractual period. Tri-party is essentially a basket form of transaction and allows for a wider range of instruments in the basket or pool. In a tri-party repo transaction, a third party clearing agent or bank is interposed between the "seller" and the "buyer". The third party maintains control of the securities that are the subject of

5607-407: The difference between the sale price and the purchase price. There are a number of differences between the two structures. A repo is technically a single transaction whereas a sell/buyback is a pair of transactions (a sell and a buy). A sell/buyback does not require any special legal documentation while a repo generally requires a master agreement to be in place between the buyer and seller (typically

5696-465: The end of the Napoleonic Wars , British government debt reached a peak of more than 200% of GDP, nearly 887 million pounds sterling. The debt was paid off over 90 years by running primary budget surpluses (that is, revenues were greater than spending after payment of interest). In 1900, the country with the most total debt was France (£1,086,215,525), followed by Russia (£656,000,000) then

5785-455: The eurozone and go back to issuing the drachma (although this would have addressed only future debt issuance, leaving substantial existing debt denominated in what would then be a foreign currency). Debt of a sub-national government is generally viewed as less risky for a lender if it is explicitly or implicitly guaranteed by a regional or national level of government. When New York City declined into what would have been bankrupt status during

5874-546: The event of a repo seller default, making it more difficult for the repo buyer to sell the collateral and recover their cash. The tri-party agents are able to offer sophisticated collateral eligibility filters which allow the repo buyer to create these "eligible collateral profiles" which can systemically generate collateral pools which reflect the buyer's risk appetite. Collateral eligibility criteria could include asset type, issuer, currency, domicile, credit rating, maturity, index, issue size, average daily traded volume, etc. Both

5963-689: The founding of the Bank of England in 1694 revolutionised public finance and put an end to defaults such as the Great Stop of the Exchequer of 1672, when Charles II had suspended payments on his bills. From then on, the British Government would never fail to repay its creditors. In the following centuries, other countries in Europe and later around the world adopted similar financial institutions to manage their government debt. In 1815, at

6052-541: The future. An example of an explicit contingent liability is a public sector loan guarantee, where the government is required to make payments only if the debtor defaults. Examples of implicit contingent liabilities include ensuring the payment of future social security pension benefits, covering the obligations of subnational governments in the event of a default, and spending for natural disaster relief. Explicit contingent liabilities and net implicit social security obligations should be included as memorandum items to

6141-410: The general government sector is the total liabilities that are debt instruments. An alternative debt measure is net debt , which is gross debt minus financial assets in the form of debt instruments. Net debt estimates are not always available since some government assets may be difficult to value, such as loans made at concessional rates. Debt can be measured at market value or nominal value . As

6230-563: The latter 2 are merely components of the former, SOFR. The Federal Reserve and the European Repo and Collateral Council (a body of the International Capital Market Association ) have tried to estimate the size of their respective repo markets. At the end of 2004, the US repo market reached US$ 5 trillion. Especially in the US and to a lesser degree in Europe, the repo market contracted in 2008 as

6319-465: The lender (repo buyer) and borrower (repo seller) of cash enter into these transactions to avoid the administrative burden of bi-lateral repos. In addition, because the collateral is being held by an agent, counterparty risk is reduced. A tri-party repo may be seen as the outgrowth of the ' due bill repo . A due bill repo is a repo in which the collateral is retained by the Cash borrower and not delivered to

6408-686: The level of government responsible for programs (for example, health care) differs across countries and the general government comprises central, state, provincial, regional, local governments, and social security funds. The debt of public corporations (such as post offices that provide goods or services on a market basis) is not included in general government debt, following the International Monetary Fund 's Government Finance Statistics Manual 2014 ( GFSM ), which describes recommended methodologies for compiling debt statistics to ensure international comparability. The gross debt of

6497-415: The owner of the securities) falling due while the repo buyer owns the securities are, in fact, usually passed directly onto the repo seller. This might seem counter-intuitive, as the legal ownership of the collateral rests with the buyer during the repo agreement. The agreement might instead provide that the buyer receives the coupon, with the cash payable on repurchase being adjusted to compensate, though this

6586-451: The principal is repaid on repurchase of the security as agreed. A repo is economically similar to a secured loan , with the buyer (effectively the lender or investor) receiving securities for collateral to protect himself against default by the seller. The party who initially sells the securities is effectively the borrower. Many types of institutional investors engage in repo transactions, including mutual funds and hedge funds. Although

6675-500: The repo buyer (the Collateral Taker/Cash Provider, "CAP") and the repo seller (Cash Borrower/Collateral Provider, "COP") agree to a collateral management service agreement which includes an "eligible collateral profile". It is this "eligible collateral profile" that enables the repo buyer to define their risk appetite in respect of the collateral that they are prepared to hold against their cash. For example,

6764-669: The rise in government debt, so the interest rate would not rise and private investment is not crowded out. Historically, there have been many cases where governments have defaulted on their debts, including Spain in the 16th and 17th centuries, which nullified its government debt several times; the Confederate States of America , whose debt was not repaid after the American Civil War ; and revolutionary Russia after 1917, which refused to accept responsibility for Imperial Russia's foreign debt. If government debt

6853-576: The rise of democracy , private financial markets , and modern economic growth . Government debt is typically measured as the gross debt of the general government sector that is in the form of liabilities that are debt instruments. A debt instrument is a financial claim that requires payment of interest and/or principal by the debtor to the creditor in the future. Examples include debt securities (such as bonds and bills), loans, and government employee pension obligations. International comparisons usually focus on general government debt because

6942-406: The same repurchase agreement from the buyer's viewpoint, not the seller's. Hence, the seller executing the transaction would describe it as a "repo", while the buyer in the same transaction would describe it a "reverse repo". So "repo" and "reverse repo" are exactly the same kind of transaction, just being described from opposite viewpoints. The term "reverse repo and sale" is commonly used to describe

7031-563: The same year, the failure of Lombard-Wall, Inc. resulted in a change in the federal bankruptcy laws pertaining to repos. The failure of ESM Government Securities in 1985 led to the closing of Home State Savings Bank in Ohio and a run on other banks insured by the private-insurance Ohio Deposit Guarantee Fund. The failure of these and other firms led to the enactment of the Government Securities Act of 1986. In 2007–2008,

7120-639: The securities they post as collateral), obtain access to cheaper funding costs for long positions in other speculative investments, and cover short positions in securities (via a "reverse repo and sale"). When transacted by the Federal Open Market Committee of the Federal Reserve in open market operations , repurchase agreements add reserves to the banking system and then after a specified period of time withdraw them; reverse repos initially drain reserves and later add them back. This tool can also be used to stabilize interest rates, and

7209-603: The supply of funds available. The New York Times reported in September 2019 that an estimated $ 1 trillion per day in collateral value is transacted in the U.S. repo markets. The Federal Reserve Bank of New York reports daily repo collateral volume for different types of repo arrangements. As of 24 October 2019, volumes were: secured overnight financing rate ( SOFR ) $ 1,086 billion; broad general collateral rate (BGCR) $ 453 billion, and tri-party general collateral rate (TGCR) $ 425 billion. These figures however, are not additive, as

7298-522: The term "matched sale" instead. In India, the Reserve Bank of India (RBI) uses repo and reverse repo to increase or decrease money supply in the economy. The rate at which the RBI lends to commercial banks is called the repo rate. In case of inflation, the RBI may increase the repo rate, thus discouraging banks to borrow and reducing the money supply in the economy. As of September 2020, the RBI repo rate

7387-552: The threshold. Excessive debt levels may make governments more vulnerable to a debt crisis , where a country is unable to make payments on its debt, and it cannot borrow more. Crises can be costly, particularly if a debt crisis is combined with a financial/banking crisis which leads to economy-wide deleveraging . As firms sell assets to pay off debt, asset prices fall which risks an even greater fall in incomes, further depressing tax revenue and requiring governments to drastically cut government services. Examples of debt crises include

7476-414: The transaction as a sale, a repo provides significant protections to lenders from the normal operation of U.S. bankruptcy laws, such as the automatic stay and avoidance provisions. Almost any security may be employed in a repo, though highly liquid securities are preferred as they are more easily disposed of in the event of a default and, more importantly, they can be easily obtained in the open market where

7565-441: The transaction is similar to a loan, and its economic effect is similar to a loan, the terminology differs from that applying to loans: the seller legally repurchases the securities from the buyer at the end of the loan term. However, a key aspect of repos is that they are legally recognised as a single transaction (important in the event of counterparty insolvency) and not as a disposal and a repurchase for tax purposes. By structuring

7654-598: The value of government debt worldwide was $ 87.4 US trillion, or 99% measured as a share of gross domestic product (GDP). Government debt accounted for almost 40% of all debt (which includes corporate and household debt), the highest share since the 1960s. The rise in government debt since 2007 is largely attributable to stimulus measures during the Great Recession , and the COVID-19 recession . The ability of government to issue debt has been central to state formation and to state building . Public debt has been linked to

7743-414: The watch of accounting firm Ernst & Young . Charges have been filed against E&Y, with the allegations stating that the firm approved the practice of using repos for "the surreptitious removal of tens of billions of dollars of securities from Lehman’s balance sheet in order to create a false impression of Lehman’s liquidity, thereby defrauding the investing public". Government debt In 2020,

7832-411: The worst effects of the 2007–2008 financial crisis at approximately $ 2.8 trillion and by mid-2010 was about $ 1.6 trillion. As tri-party agents administer the equivalent of hundreds of billions of USD of global collateral, they have the scale to subscribe to multiple data feeds to maximise the universe of coverage. As part of a tri-party agreement the three parties to the agreement, the tri-party agent,

7921-439: Was because treasuries are the most commonly used collateral in the US repo market, and as a default would have downgraded the value of treasuries, it could have resulted in repo borrowers having to post far more collateral. During September 2019, the U.S. Federal Reserve intervened in the role of investor to provide funds in the repo markets, when overnight lending rates jumped due to a series of technical factors that had limited

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