Under a pension contract, the Federal Reserve (Fed) buys U.S. Treasury bonds, U.S. agency securities or mortgage-backed securities from a primary trader who agrees to buy them back within one to seven days; an inverted deposit is the opposite. This is how the Fed describes these transactions from the perspective of the counterparty and not from its own point of view. The same principle applies to rest. The longer the life of the pension, the more likely it is that the value of the security will fluctuate prior to the buyback and that economic activity will affect the supplier`s ability to execute the contract. In fact, counterparty credit risk is the main risk associated with rest. As with any loan, the creditor bears the risk that the debtor will not be able to repay the investor. Rest acts as a guaranteed debt, which reduces overall risk.
And because the price of the pension exceeds the value of the security, these agreements remain mutually beneficial to buyers and sellers. The main difference between a term and an open repo is between the sale and repurchase of the securities. A pension purchase contract (repo) is a form of short-term borrowing for government bond traders. In the case of a repot, a trader sells government bonds to investors, usually overnight, and buys them back the next day at a slightly higher price. This small price difference is the implied day-to-day rate. Deposits are generally used to obtain short-term capital. They are also a common instrument of central bank open market operations. Deposits with longer tenors are generally considered riskier. Over a longer period of time, there are more factors that can affect the solvency of purchasers, and changes in interest rates affect the value of the repurchased asset. Pension transactions are generally considered to be credit risk instruments. 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. In these cases, the purchaser of the guarantee can then liquidate the guarantee in an attempt to recover the money he originally paid.
However, the reason this is an inherent risk is that the value of the warranty may have decreased since the first sale and therefore cannot leave the buyer with any choice but to maintain the security he never wanted to maintain in the long term, or to sell it for a loss. On the other hand, this transaction also poses a risk to the borrower; If the value of the guarantee increases beyond the agreed terms, the creditor cannot resell the guarantee. 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.