REPURCHASE AGREEMENT (“REPO”) / RESERVE REPO
A REPO is a money market transaction wherein securities are sold at a particular price by one party (REPO Seller) to the other (REPO Buyer) with a commitment on the REPO Seller’s part to repurchase the equivalent securities from the REPO Buyer on a certain date and at a certain price, both such date and price being fixed as part of the transaction.
A Reserve REPO is a money market transaction wherein the securities are bought at a particular price by one party (REPO buyer) from the other (REPO seller) with a commitment on the REPO buyer’s part to sell the equivalent securities back to the REPO Seller on a certain date and at a certain price, both such date and price being fixed as part of the same transaction.
| 2. Purpose
To provide a possible secondary market for money market instruments as most fund managers were unwilling to purchase money market outright.Repo transactions provided the financial institutions with excess liquidity financial assets but in tight liquidity conditions as a source of raising funds. It could be linked to secured borrowing.
| 3. How it is created?
It started in the United States as early as 1917. At first REPOs were used just by the Federal Reserve to extend the credit to member banks, but the practise soon spread to other market participants.
4. Eligible Parties
Eligible parties to a REPO / Reserve REPO transaction include both Licenced Financial Institution and Non-Financial Institution subject to the requirement that at least one principal to the REPO / Reverse REPO transaction must be Licenced Financial Institution. 1) Financial Institutions – retail and commercial banks, investment bank, building society. 2) Investors – Corporate Treasuries, Fund managers, local authorities
| 5. Rights, Responsibilities, Returns and Risks of each parties involved
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