www.bloomberg.com/news/articles/2018-09-11/decade-after-repos-hastened-lehman-s-fall-the-coast-isn-t-clear For example, Dealer A may sell a specific warranty to Distributor B at a specified price and agree to purchase the warranty at a later date for a specified amount. In reality, the sale is not a real sale, but a loan guaranteed by security. As with secured loans, the guarantee used as collateral is “owned” by Dealer B (in the event of dealer A default and does not refund the amount to Dealer A. The incremental amount that must be repaid by Trader A to redeem the guarantee is the amount of “interest” earned by Traders B on the loan. The parts of the repurchase and reverse-repurchase agreement are defined and agreed upon at the beginning of the agreement. This is the “eligible security profile” that allows the purchaser to take the risk of defining his appetite for risk with respect to the collateral he is willing to hold for his money. For example, a more reluctant pension buyer may only hold “current” government bonds as collateral. In the event of liquidation of the pension seller, the guarantee is highly liquid, so that the pension buyer can quickly sell the security. A less reluctant pensioner may be willing to take bonds or shares as collateral without investment degree bonds or shares, which may be less liquid and which, in the event of a pension seller`s default, may experience higher price volatility, making it more difficult for the pension buyer to sell the guarantees and recover his money. Tripartite agents are able to offer sophisticated collateral filters that allow the repo buyer to create these “legitimate collateral profiles” capable of generating systemic collateral pools reflecting the buyer`s appetite for risk.  Pension transactions are generally considered safe investments, since the security in question is a guarantee, which is why most contracts involve U.S. Treasury bonds. Considered an instrument of the money market, a pension purchase contract is indeed a short-term loan, guaranteed by security and an interest rate.
The buyer acts as a short-term lender, the seller as a short-term borrower. The securities sold are the guarantees. This will help achieve the objectives of both parties, namely the guarantee of financing and liquidity. The main difference between a term and an open repo is between the sale and repurchase of the securities. In a repo, the investor/lender provides cash to a borrower, the loan being secured by the borrower`s collateral, usually bonds. If the borrower becomes insolvent, the guarantee is granted to the investor/lender. Investors are generally financial enterprises such as money funds, while borrowers are non-intrusive financial institutions, such as investment banks and hedge funds. The investor/lender calculates an interest rate called “pension rate” $X the granting of loans and recovers a higher amount $Y. In addition, the investor/lender may demand guarantees that require a value greater than the amount he lends.
This difference is the “haircut.” These concepts are illustrated in the diagram and in the equations section. If investors are at greater risk, they may charge higher pension interest rates and demand higher reductions. A third party may be involved to facilitate the transaction; In this case, the transaction is called a “tri-party deposit.”  Cornell Law School. “Counterparty credit risk related to repurchase transactions, mortgages and OTC derivatives.” Access on August 14, 2020. If the Federal Reserve is one of the acting parties, the PC is called a “system repository,” but if they act on behalf of a client (. B for example, a foreign central bank), it is called a “customer repository.” Until 2003, the Fed did not use the term “reverse repo” – which it said implied that it was borrowing money (against its charter), but instead used the term “matched sale.”