Robinhood. “What are the legs near and far in a buyout contract?” Retrieved August 14, 2020. In mid-September 2019, two events coincided to increase the demand for cash: quarterly corporate taxes were due and the settlement date of treasury securities previously auctioned. This resulted in a significant transfer of reserves from the financial market to the government, which led to an imbalance between the demand for and supply of reserves. But these two expected developments do not fully explain the volatility of the repo market. For the buyer, a repo is an opportunity to invest cash for a certain period of time (other investments usually limit the duration). It is short-term and safer than the guaranteed investment, because the investor receives guarantees. Market liquidity for deposits is good and prices are competitive for investors. Money Funds are major buyers of retirement operations. For the party who sells the security and agrees to buy it back in the future, it is a repo; For the party at the other end of the transaction, which buys the security and agrees to sell in the future, this is a reverse retirement transaction. The short answer is yes – but there are significant differences of opinion about the importance of the factor. Banks and their lobbyists tend to say that the rules were a bigger cause of the problems than the policymakers who put the new rules in place after the 2007-9 global financial crisis.

The intent of the rules was to ensure that banks have sufficient capital and liquidity that can be sold quickly in case of difficulties. These rules may have led banks to maintain reserves instead of lending them in the repo market in exchange for government bonds. There are mechanisms built into the buyback space to reduce this risk. For example, a lot of rest is over-guaranteed. In many cases, if the collateral loses value, a margin call may take effect to ask the borrower to change the securities offered. In situations where it seems likely that the value of the security may increase and the creditor may not resell it to the borrower, the subsecure may be used to mitigate the risks. The term repo has given rise to many misunderstandings: there are two types of transactions with identical cash flows: the Fed is considering the creation of a permanent repo mechanism. a standing offer to borrow a certain amount of cash from borrowers repo each day. It would set an effective ceiling for short-term interest rates; No bank would borrow at a higher interest rate than it could get directly from the Fed. A new facility “would likely provide a significant guarantee for control of the federal funds rate,” Fed employees told officials, while temporary operations would provide less precise control over short-term interest rates. An open retirement operation (also known as an on-demand repo) works in the same way as a term pension, except that the trader and the counterparty accept the transaction without setting the maturity date.

. . .