What is a positive repurchase?
Xiaobian to introduce it to you!
A repurchase is a transaction in which one party borrows money against a certain amount of bonds and promises to repurchase the bonds at a later date.
It is also one of the open market operations often used by the central bank. The central bank can withdraw funds from the market by using the positive repo operation.
Compared with the central bank bills, the repurchase will reduce operating costs, while locking up funds more effective, reduce liquidity.
From the origin of repo transactions, repo transactions are closely related to central bank operations from the very beginning.
The Federal Reserve created repo transactions in 1918 to promote the development of bankers’ acceptances, only they were backed by bankers’ acceptances rather than bonds.
Therefore, bond repo transactions initiated by the central bank as a positive repo party are referred to as positive repo operations by the central bank.
The bond repo transaction initiated by the central bank as the reverse repo party is the reverse repo operation of the central bank.
According to the international practice, the central bank usually selects some commercial banks with strong capital strength, good reputation and active trading, or trust companies, namely the primary dealers in the open market, as counterparties to carry out forward and reverse repo transactions through bidding.
Generally speaking, in order to make its active repo operation successful, the central bank will often offer a repo rate slightly higher than the market repo rate when conducting quantity bidding. In this way, it is easier to reach a deal and play the purpose of smooth fund recovery.
When the central bank conducts reverse repo transactions, the repo rate it offers is often lower than the market repo rate.