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Repurchase Agreement (REPO)

REPO (from French report) - transactions for the sale (purchase) of equity securities (the first part of the REPO) with the obligatory subsequent repurchase (sale) of securities of the same issue in the same quantity (the second part of the REPO) after a period specified in the agreement at a price, established by this agreement at the conclusion of the first part of such transaction. It’s a form of short-term loan, a type of loan, the fee for which is the difference in prices, which, in its turn, is the overnight interest rate. Repo rates are set by the Central Bank. In this way, both parties to the transaction achieve their objectives in the form of secured funding and liquidity. REPO transactions are usually the instrument used by the Central Bank in the open market.

There are two parties involved in a repo transaction, for the seller of the security the transaction is a repo agreement, and for the buyer it is a buyback agreement. A Repo agreement is generally considered a safe investment because the security is collateral. The main difference between a repo agreement and a secured loan is that in the event of bankruptcy, investors will be able to sell the collateral.

REPOs can be made between different market participants. Individuals enter into such agreements for the purchase of bonds and other securities, having sold them under a REPO transaction and receiving payments from this transaction, the investor can reinvest in the subsequent purchase of securities. The Fed and central banks use REPOs to regulate bank reserves and the money supply.

There are two types of repo agreements - fixed-term and open-ended. The main difference between them is that in the first case a certain maturity date is fixed; in the second case the maturity date is not set, however, either party of the transaction can terminate it any day by sending a notification to the counterparty before the time established by mutual agreement of the parties (the second party has in such a case, an obligation to terminate the transaction). The interest rate on open REPO transactions is regularly revised, interest is paid monthly.
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