Deposits with a specified maturity date (usually the next day or the following week) are long-term repurchase contracts. A trader sells securities to a counterparty with the agreement that he will buy them back at a higher price at a given time. In this agreement, the counterparty receives the use of the securities for the duration of the transaction and receives interest that is indicated as the difference between the initial selling price and the purchase price. The interest rate is set and interest is paid at maturity by the trader. In determining the actual costs and benefits of a pension transaction, the buyer or seller who wishes to participate in the transaction must take into account three different calculations: in general, the credit risk for pension transactions depends on many factors, including the terms of the transaction, the liquidity of the security, the specifics of the counterparties concerned and much more. A sale/buy-back is the cash sale and pre-line repurchase of a security. These are two separate pure elements of the cash market, one for settlement in advance. The futures price is set against the spot price in order to obtain a market return. The basic motivation of Sell/Buybacks is generally the same as in the case of a conventional repo (i.e.
the attempt to take advantage of the lower financing rates generally available for secured loans, unlike unsecured loans). The profitability of the transaction is also similar, with interest on the money borrowed from the sale/purchase being implicitly included in the difference between the sale price and the purchase price. Like many other corners of finance, retirement operations contain terminology that is not common elsewhere. One of the most common terms in repo space is «leg.» There are different types of legs: for example, the part of the retirement activity that originally sells security is sometimes called «starting leg,» while the subsequent buyback is the «close leg.» These terms are sometimes replaced by «Near Leg» or «Far Leg.» Near a repo transaction, security is sold. It is redeemed at the back. There are a number of differences between the two structures. A repo is technically a single transaction, while a sale/buyout is a pair of transactions (a sale and a purchase). The sale/purchase does not require specific legal documents, whereas a repo usually requires a master`s agreement between the buyer and the seller (usually the Global Master Repo Agreement (GMRA) mandated by SIFMA/ICMA). For this reason, there is an increase in the risk associated with Repo.
If the counterparty were to become insolvent, the absence of an agreement could reduce the legal position on appeal. As a general rule, any coupon payment on the underlying warranty during the duration of the sale/buyback is returned to the purchaser of the guarantee by adjusting the cash paid at the end of the sale/purchase.