For example, in a case where a hedge fund wants to sell some DBR 4s, the loan will be short, and therefore to make it available, it is borrowed from another location. In short, according to a hedge fund, there will be a reverse buyback involving the liquidation of securities. The University of Manhattan. “Buyout Contracts and the Law: How Legislative Amendments Fueled the Housing Bubble,” page 3. Access on August 14, 2020. 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; in the case of most secured loans, bankrupt investors would be subject to automatic stay. However, the initial money would be based on the market value of the guarantees, and as a general rule, the lender would apply a haircut, say 2%, so that you will receive cash of 98% of the market value of the guarantees. The redemption price is calculated on the basis of this initial cash, so you pay interest on what you borrowed. The haircut is intended to protect the lender in the event of a decrease in the value of collateral or to reflect other security-related risks such as illiquidity, incorrect risk, etc. The intial margin plays a similar role in the Exchange Cleared transaction.
The main difference between a term and an open repo is between the sale and repurchase of the securities. For example, Dealer A may sell a certain warranty to Dealer B at a specified price and agree to repurchase the warranty for a specified amount at a later date. 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. A decisive calculation in each repurchase agreement is the implied interest rate.