Securities purchased under resale contracts (“reverse pensions”) and securities sold in repurchase transactions (“pensions”) are considered guaranteed financing transactions and are accounted for at fair value in the first place, i.e. the amount of cash paid or received. The party paying the money takes possession of the collateral that serves as collateral for the financing and which have a market value equal to or greater than the amount of the capital borrowed. Securities received under self-payment agreements and securities delivered in repurchase transactions are not recorded or recognized from the balance sheet unless the risks and income of the property are determined or abandoned. Reverse repurchase agreements (RRPs) are the end of a pension purchase agreement. These financial instruments are also called secured loans, buy-back/sale loans and loans for sale/buyback. In a macro example of RRPs, the Federal Reserve Bank (Fed) uses deposits and RRPs to ensure the stability of credit markets through open market transactions (OMO). The RRP transaction is used less than a Fed repo, because a repo invests money in the banking system when it is short, while an RRP borrows money from the system when there is too much liquidity. The Fed is implementing RRPs to maintain long-term monetary policy and ensure the level of capital liquidity in the market. An RRP differs from Buy/Sell Backs in a simple but clear way. Purchase/sale agreements document each transaction separately and provide a clear separation in each transaction.
In this way, each transaction can be legally isolated, without the other transaction being fully feasible. On the other hand, the RRPs have legally documented every step of the agreement under the same treaty and guarantee availability and right at every stage of the agreement. Finally, the warranty in an RRP, although the security is essentially acquired, usually never changes the physical location or actual property. If the seller is late to the buyer, the warranties must be physically transferred. The BoC used the term “PRAs” for the first time in December 2007, following the worsening of Canadian money markets during global financing problems following the onset of the 2007 financial crisis; A brief easing of the situation was reversed in March 2008, when funding pressure again manifested itself, causing the collapse of Bear Sterns. The BoC allowed ES to mature the PRAs in June and July so that the fall of Lehman and the near-bankruptcy of AIG in September 2008 again affected the money market and used PRAs again to facilitate conditions. The last PRA matured in 2010. In a PRA clause, the BoC will purchase securities from a certain type of bank (i.e.
a primary trader in Canadian government bonds) with an agreement to resell them to that bank after a certain maturity, which could be up to one year. The result is a temporary injection of money (since banks receive payment of securities) on the money market, which helps to improve liquidity and lower market interest rates.