In the United States, the most common type of repo is the tripartite agreement. A large investment bank acts as an intermediary. It mediates an agreement between a financial institution that needs liquidity, usually a stockbroker or hedge fund, and another with a surplus to lend, such as a money fund.B. A reverse repurchase agreement, or “re-pension,” is the purchase of securities with the agreement to sell them at a higher price at a certain future time. For the party that sells the guarantee (and agrees to buy it back in the future), it is a buy-back (RP) or repo contract; for the other end of the transaction (purchase of security and consent to the sale in the future), it is a reverse repurchase agreement (RRP) or Reverse Repo. To explain the difference between the sales bill and the secure loan, look at the example of Lehman Brothers, which used major repo programs before finally going bankrupt in 2008. His practices are described in more detail in “How Lehman Brothers and MF Global`s Misuse of Repurchase Agreements Reformed Accounting Standards” on page 44 of this issue. In short, Lehman`s goal in using repo operations was to reduce the overall size of its balance sheet and reduce its leverage ratio, both of vital importance to maintaining a good credit rating. Guaranteed credit accounting does not achieve this objective and would result in unchanged leverage ratios. As a result, Lehman held a sales accounting with a buyout agreement. In this treatment, there is no recognition of a contractual obligation to repurchase in the balance sheet. The securities are debited at the time of return, the call option is removed and the cash returned to the lender includes an interest payment.

Exhibits 1 and 2 illustrate this approach. In total, Repos Lehman helped remove up to $50 billion of debt from the balance sheet, which had little or no impact on other financial statements. The bonds recorded as collateral remain on the balance sheet. In 2014, the FASB issued amended accounting rules and returns for certain types of repurchase transactions (repo). According to the new guide, certain pension transactions, previously recorded as sales, must now be accounted for in the form of secured bonds. The new rules also require increased publicity. As a result, companies may be required to reduce or eliminate the use of deposits as a means of off-balance sheet financing. While stricter accounting rules are designed to prevent “repo runs” like those that lead to the failure of Lehman Brothers, less use of the pension market could lead to increased volatility in short-term interest rates. Retirement markets offer easy-to-access financing to institutions such as security guards and hedge funds. They also allow institutional investors, such as pension funds and municipalities, to earn a return on excess liquidity.

Both their size of several trillion dollars and their role in providing liquidity demonstrate the importance of pension markets. For the party that sells security and agrees to buy it back in the future, it is a repo; for the party at the other end of the transaction, the purchase of the warranty and the consent to sell in the future, it is a reverse buyback contract. There are mechanisms built into the possibility of buyback agreements to reduce this risk. For example, many depots are over-secure. In many cases, a margin call may take effect to ask the borrower to change the securities offered when the security loses value. In situations where the value of the guarantee is likely to increase and the creditor cannot resell it to the borrower, subsecured protection can be used to reduce risk.