REVERSE REPURCHASE AGREEMENT (RRP’s)

DEFINITION In a reverse repo, securities are acquired with a simultaneous commitment to resell. Also known as reverse, reversing in, to do repo or to buy collateral. A reverse repurchase agreement is the purchase of securities with the agreement to sell them at a higher price at a specific future date. The investor takes the security from the lender and immediately sells it on the open market. Then, when the time comes, the borrower will go out and purchase the same security and get it back to the lender.

DEFINITION SELLER/ BORROWER SELLER/ BORROWER INVESTOR/ LENDER OF MONEY CASH INVESTOR/ LENDER OF MONEY SELLER/ BORROWER COLLATERAL At Maturity: CASH + Repo price INVESTOR/ LENDER OF MONEY SELLER/ BORROWER COLLATERAL

TYPES OF RRP’s Due Bill - an internal account is used to keep the collateral for the borrower. 2. Tri-Party Repo - With this type of transaction, another party acts as the intermediary between the borrower and the lender. -The lender will give the third party the collateral, and the third party will then give the borrower some type of substitution collateral. 3. Whole Loan Repo - With this type of transaction, the borrower use a loan or some other debt obligation as the collateral instead of a financial security. 4. Equity Repo - uses equities instead of bonds. The underlying security of the transaction will be stock in a company. 5. BUY/SELL Repo -  a formal repurchase agreement is not actually put into place. Instead, they will buy a security and sell it on a forward repurchase at the same time. 6. Securities Lending -  This is typically done when an seller / borrower wants to go short on a particular type of security. -He has to give cash plus the interest rate in order to complete the financial transaction. Then the security go back to the borrower.

LIMITATIONS IN THE USE OF RRP’s AS A MEANS OF CONTROL Reverse repos offer the holders of fixed income securities - an opportunity to raise funding at attractive rates, to increase their portfolio return through arbitrage programs, and also to participate in leveraged market plays. Entities looking to borrow funds and whose name and credit rating - would not be well received in the commercial paper market or to foreign borrowers whose name is new to the domestic credit markets.

LIMITATIONS IN THE USE OF RRP’s AS A MEANS OF CONTROL The securities holder has in effect liquidated his "underwater" - securities without incurring a capital loss and has at the same time improved the overall yield of his portfolio. Valuable to individuals holding securities whose market value is inferior to its original cost and where an outright sale - would generate a capital loss.

ADVANTAGES OF USING RRP'S AS A MODE OF CONTROL Increase profits and portfolio yield by reversing in idle securities. Decrease cost of funding, or access funding where otherwise not possible. Flexibility to meet individual needs, in terms of maturities and securities to reverse in. Vehicle for leveraged market plays.