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Us Government Agency Repurchase Agreement

In mid-September 2019, two events coincided to increase the demand for liquidity: quarterly corporate taxes were due and this was the date of settlement of previously auctioned Treasury bills. The result is a significant transfer of reserves from the financial market to the state, which has led to a disparity between demand and supply of reserves. But these two expected developments do not fully explain the volatility of the pension market. A pension purchase contract, also known as repo, PR or Surrender and Repurchase Agreement, is a form of short-term borrowing, mainly in government bonds. The distributor sells the underlying guarantee to investors and, by mutual agreement between the two parties, buys it back shortly thereafter, usually the next day, at a slightly higher price. At the Hutchins Center event, however, Tarullo found that reserves and treasuries “are not treated as fungible when planning resolution or liquidity stress tests.” In the post-crisis context, banks are required to conduct their own internal liquidity resistance tests, the Comprehensive Liquidity Analysis and Review (CLAR), which are controlled by supervisory authorities. Banks prefer reserves for balances because reserves can meet large intra-day commitments that Treasuries are unable to meet. Banks also say that state supervisors sometimes express a preference, that banks hold reserves instead of Treasury bills by questioning the assumptions banks make when they say they could quickly sell government bonds without much discount in a moment of stress. When the government is in a budget deficit, it borrows by issuing government bonds.

The additional debt leaves the major traders – Wall Street intermediaries who buy the securities from the government and sell them to investors – with an increasing amount of collateral that can be used in the pension market. Deposits with longer tenors are generally considered riskier. Over a longer period of time, there are more factors that can affect the solvency of the supplier and changes in interest rates have a greater impact on the value of the asset repurchased. The main difference between a term and an open repot is between the sale and repurchase of the securities. A pension contract (repo) is a short-term guaranteed credit: one party sells securities to another and agrees to buy them back at a higher price at a later price. The securities serve as collateral. The difference between the initial price of the securities and their redemption price is that of the interest paid on the loan called the pension rate. Since the advent of COVID-19, the Fed has significantly increased the volume of its repo operations in order to bring money to money markets. The Fed facility provides primary traders with liquidity in exchange for cash and other government-guaranteed securities.

Before the coronavirus turmoil was put on the market, the Fed offered $100 billion in overnight pension and $20 billion in two-week repo. On March 9, the company was launched with a deposit of $175 billion over two weeks and $45 billion in two weeks of repo. On March 12, the Fed announced a huge expansion. It is now on a weekly basis offering much longer terms: $500 billion for a pension month and $500 billion for three months. On March 17, at least for a period, it also greatly increased the night pension offered. The Fed said the liquidity transactions were aimed at “addressing very unusual disruptions in financial treasury markets related to the emergence of coronavirus.” In short, the Fed is now ready to lend the markets an essentially unlimited money supply, and the reception has fallen well below the amounts offered.

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