There are three main types of pension transactions on the market: foreign pension, repo held and specialized delivery repo. In the United States, standard and reverse agreements are the most commonly used instruments for open market operations for the Federal Reserve. A pension transaction (PR) is a short-term loan in which both parties agree to the sale and future repurchase of assets within a certain contract term. The seller sells a treasury order or other state security with the promise to repurchase them at a given time and at a price that includes an interest payment. Whereas a pension purchase agreement is for a party to sell a security with the promise of buying it back later, a reverse repurchase agreement is exactly the opposite. A reverse repo is when a party buys a security with the promise of later reselling it at a higher price. A pension purchase contract (Repo) is a short-term credit instrument that a company, often a government, could use to raise short-term funds. A pension transaction may be considered an open term or contract, depending on the length of the seller`s sale of the securities and the time he buys them back. 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. With respect to securities lending, it is used to temporarily obtain the guarantee for other purposes, for example. B for short position hedging or for use in complex financial structures. Securities are generally borrowed for a royalty, and securities borrowing transactions are subject to other types of legal agreements than deposits. In some cases, the underlying security may lose its market value for the duration of the pension agreement. The buyer can ask the seller to finance a margin account on which the price difference is identified. These agreements are beneficial to both parties. First, they allow the seller to raise the necessary funds in the short term. They are also beneficial to the buyer, as they allow them to make a profit in a short time. A pension purchase contract, also known as repo, PR or Surrender and Repurchase Agreement, is a form of short-term borrowing, mainly in government bonds.
The distributor sells the underlying guarantee to investors and, by mutual agreement between the two parties, buys it back shortly thereafter, usually the next day, at a slightly higher price. When state-owned central banks buy back securities from private banks, they do so at an updated interest rate, called a pension rate. Like policy rates, pension rates are set by central banks. The repo-rate system allows governments to control the money supply within economies by increasing or decreasing available resources. A reduction in pension rates encourages banks to resell securities for cash to the state. This increases the money supply available to the general economy. Conversely, by raising pension rates, central banks can effectively reduce the money supply by discouraging banks from reselling these securities. Repo operations take three forms: specified delivery, tri-party and deposit (the «sell» part holding the guarantee during the life of the repo). The third form (Hold-in-custody) is quite rare, especially in development-oriented markets, due in part to the risk that the seller may intervene before the transaction is completed and that the buyer will not be able to recover the guarantees issued as collateral for the transaction.
The first form – the indicated delivery – requires the delivery of a predetermined loan at the beginning and maturity of the contract.