The Fed said it intends to further reduce its repo inventories. If you do, we`ll see in this week`s charts how it should affect stock prices. But if the coronavirus liquidation is pushing the Fed to revise its policy (as it should be for interest rate policy), then this historical perspective can help you know how to interpret all of the Fed`s announcements about its plans for the future in the repo market. As part of a repo agreement, the Federal Reserve (Fed) buys U.S. Treasury bonds, securities from U.S. authorities or mortgage securities from a primary trader who agrees to buy them back generally within one to seven days. An inverted repo is the opposite. Therefore, the Fed describes these transactions from the counterparty`s perspective and not from its own perspective. A sell/buyback is the cash sale and redemption at the front of a security. These are two separate direct spot market transactions, one for futures settlement. The futures price is set in relation to the spot price in order to obtain a return on the market. The fundamental motivation for sales/redemptions is usually the same as for a classic repo (i.e.: The attempt to take advantage of the lower funding rates generally available for secured loans compared to unsecured loans). The profitability of the operation is also similar, with the interest on the money borrowed by the sale/redemption implicitly in the difference between the sale price and the purchase price.
When repo transactions are settled by the Federal Open Market Committee of the Federal Reserve as part of open market operations, repo transactions add reserves to the banking system and then withdraw them after a certain period of time; Reverse-rests first remove reserves and then add them again. This instrument can also be used to stabilize interest rates and the Federal Reserve has used it to adjust the federal funds rate to the target rate.  Repo operations take place in three forms: specified delivery, tri-party and retention (the „selling“ party holding the guarantee for the duration of the repo). The third form (Hold-in-Custody) is quite rare, especially in development markets, especially because of the risk that the seller will become insolvent before the repo expires and the buyer will not be able to recover the securities that have been reserved as collateral for the transaction. The first form – the specified delivery – requires the delivery of a predefined loan at the beginning and expiry of the contract term. Tri-Party is essentially a form of shopping cart of the transaction and allows for a wider range of instruments in the basket or pool. In the case of a tri-party-repo transaction, an external clearing agent or bank between the „seller“ and the buyer is invited. The third party retains control of the securities that are the subject of the contract and processes payments from the „seller“ to the „buyer“. The Federal Reserve decided in September 2019 that it would intervene in the „pensions“ or pensions market. Why the Fed`s Honchos decided they had to will be an interesting topic for future historians.
For current market historians, the important point of the Fed`s intervention in the repo market is that it has been beneficial to stock prices for the Fed to add liquidity in this way. And the Fed`s gradual exit since early January has meant a withdrawal of liquidity from the banking system and investment accounts, putting stock prices under pressure. The novel coronavirus has only increased this downward pressure. Deposits were traditionally used as a form of secured loan and were treated as such for tax purposes. However, modern repurchase agreements often allow the cash lender to sell the security provided as collateral and replace an identical security at the time of redemption.  In this way, the cash lender acts as a borrower of securities and the repo contract can be used to take a short position in the security, much like a securities loan could be used.  There are a number of differences between the two structures. . . .