Pension transactions are generally considered to be a reduction in credit risk. The biggest risk in a repo is that the seller does not maintain his contract by not repuring the securities he sold on the due date. In these cases, the purchaser of the guarantee can then liquidate the guarantee in an attempt to recover the money he originally paid. However, the reason this is an inherent risk is that the value of the warranty may have decreased since the first sale and therefore cannot leave the buyer with any choice but to maintain the security he never wanted to maintain in the long term, or to sell it for a loss. On the other hand, this transaction also poses a risk to the borrower; If the value of the guarantee increases beyond the agreed terms, the creditor cannot resell the guarantee. The buy-back contract, or “repo,” the market is an opaque but important part of the financial system, which has recently attracted increasing attention. On average, $2 trillion to $4 trillion in pension transactions are traded every day — guaranteed short-term loans. But how does the pension market work, and what about it? Haircuts are the way in which the repurchase market can impose a margin on the auxiliary seller. Here`s a simple example. Suppose a 2% discount is applied to a pension market with a market value of $10 million. The seller receives only 9.8m from the buyer and the interest on the pension is charged at $9.8m.
Despite the similarities with secured loans, deposits are actual purchases. However, since the purchaser only temporarily owns the guarantee, these agreements are often considered loans for tax and accounting purposes. In the event of bankruptcy, pension investors can, in most cases, sell their assets. This is another difference between pension credits and secured loans; For most secured loans, insolvent investors would remain automatic. An open pension contract (also called on demand) works in the same way as a term pension, except that the trader and counterparty accept the transaction without setting the due date. On the contrary, trade can be terminated by both parties by notifying the other party before an agreed daily period.