The parts of the repurchase and reverse-repurchase agreement are defined and agreed upon at the beginning of the agreement. Deposits are traditionally used as a form of secured loan and have been treated as such tax-wise. However, modern repurchase agreements often allow the lender to sell the collateral provided as collateral and replace an identical guarantee when buying back. [14] In this way, the lender will act as a borrower of securities, and the repurchase agreement can be used to take a short position in the guarantee, as could a securities loan be used. [15] Although the transaction is similar to a loan and its economic effect is similar to a loan, the terminology is different from that of the loans: the seller legally buys the securities back from the buyer at the end of the loan period. However, an essential aspect of rest is that they are legally recognized as a single transaction (important in the event of a counterparty`s insolvency) and not as a transfer and redemption for tax purposes. By structuring the transaction as a sale, a repot provides lenders with significant protection against the normal functioning of U.S. bankruptcy laws, such as. B automatic suspension and prevention of provisions. There are mechanisms built into the possibility of buyback agreements to reduce this risk. For example, many depots are over-secure. In many cases, a margin call may take effect to ask the borrower to change the securities offered when the security loses value.
In situations where the value of the guarantee is likely to increase and the creditor cannot resell it to the borrower, subsecured protection can be used to reduce risk. Beginning in late 2008, the Fed and other regulators adopted new rules to address these and other concerns. One consequence of these rules was to increase pressure on banks to maintain their safest assets, such as Treasuries. They are encouraged not to borrow them through boarding agreements. According to Bloomberg, the impact of the regulation was significant: at the end of 2008, the estimated value of the world securities borrowed was nearly $4 trillion. But since then, that number has been close to $2 trillion. In addition, the Fed has increasingly entered into pension (or self-repurchase) agreements to compensate for temporary fluctuations in bank reserves. In addition, retirement transactions have become one of the main sources of financing for owner offices and hedge funds. It is therefore important to understand how retirement operations work. Jamie Dimon, President and CEO of J.P. Morgan Chase, draws attention to these restrictions as a problem. In a telephone conversation with analysts in October 2019, he said: “We believe this is necessary when resolving and reviewing the recovery and liquidity.
That`s why we couldn`t turn it into a repo-market, which we would have wanted to do. And I think it`s up to the regulators to decide that they want to recalibrate the kind of cash they expect from us on this account. Before the global financial crisis, the Fed operated within a so-called “limited reserves” framework.