Repurchase agreement
From MBA Think Tank Encyclopedia ( http://wiki.mbalib.com/ )
Repurchase agreement
Overview of repurchase agreements
Repurchase agreement refers to short-term financing with marketable securities as collateral , which is manifested in the form of conditional securities trading.
If the holders of securities are not willing to give up their securities when their funds are temporarily insufficient, they can sell the securities by way of a repurchase agreement and sign an agreement with the buyer to retain this portion after a certain period of time (such as one day) The right to buy back all securities at the agreed price, and pay a certain interest . The payment of interest is either added to the agreed price or calculated separately. There is also a "reverse repurchase agreement" in which the party who has loaned funds to obtain securities promises to sell the securities after a certain period of time and recover the loaned funds.
The term of the repurchase agreement is generally very short, the most common is overnight lending, but there are also long term. In addition, there is also a form of "continuous contract". This form of repurchase agreement has no fixed period. Only when neither party expresses the intention of termination, the contract is automatically extended every day until one party proposes to terminate it.
Features of repurchase agreement
The repurchase agreement method has the following characteristics:
① Combining the income of funds with liquidity has increased the interest of investors. Investors are completely free to sign a repurchase agreement of "the next day" or "continuous contract" with the borrower according to their own funding arrangements, so as to increase the return of funds on the premise that the funds can be recovered at any time for other uses.
②It enhances the liquidity of long-term bonds and avoids possible losses that may be caused by securities holders selling long-term assets to realize cash.
③It has strong safety. Repurchase agreements generally have a short term and 100% bonds are used as collateral, so investors can withdraw funds in time according to changes in the capital market to avoid long-term investment risks.
④ Long-term repurchase agreements can be used for arbitrage. If a bank obtains funds through a repurchase agreement at a lower interest rate , and then lends it at a higher interest rate, the interest margin can be obtained .
In the United States, the interest rate in the repurchase agreement market is generally based on the interest rate in the Federal Reserve Funding Market, but it is often slightly lower. As an important short-term financing method, repurchase agreements have received increasing attention.