Securities Purchased Under Resale Agreements

Central bank funds sold under resale contracts and securities purchased as part of resale agreements. The BoC will purchase securities from a certain type of bank (i.e., a primary trader in Canadian government bonds) with the agreement to resell them to that bank after a certain maturity, which could be up to one year. The result is a temporary injection of money (since banks receive payment of securities) on the money market, which helps to improve liquidity and lower market interest rates. A reverse pension contract, or “reverse pension,” is the purchase of securities with the agreement to sell them at a higher price at any given 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. Reverse repurchase agreements (RRPs) are the end of a pension purchase agreement. These financial instruments are also called secured loans, buy-back/sale loans and loans for sale/buyback. Securities purchased under resale contracts (“reverse pensions”) and securities sold in repurchase transactions (“pensions”) are considered guaranteed financing transactions and are accounted for at fair value in the first place, i.e. the amount of cash paid or received. The party paying the money takes possession of the collateral that serves as collateral for the financing and which have a market value equal to or greater than the amount of the capital borrowed. Securities received under self-payment agreements and securities delivered in repurchase transactions are not recorded or recognized from the balance sheet unless the risks and income of the property are determined or abandoned. If this were the case, the BoC would have credited the accounts held by the commercial banks with the BoC with new reserves as payment of acquired assets.

In the following graph, these are counted as Canadian dollar deposits for Members of Payments Canada. Alternatively, commercial banks have the option of emptying their reserves by transferring deposits from the Canadian government to the BoC. As a result, Members of Payments Canada deposits would remain the same, but Canadian dollar deposits for the “Government of Canada” increase by an equivalent amount in the table below. The chart below shows the “Securities Acquired under Resale Agreements” (SPRA) component of the Bank of Canada`s balance sheet: To further explain the BoC`s request to bring short-term liquidity to the market, it does so by purchasing assets from a commercial bank in exchange for bank reserves. These assets are acquired with the agreement that, in the near future, commercial banks will repurchase these assets at a known price and on a date set by the BoC. These “buy-back contracts” are referred to as SPRAs in the BoC`s balance sheet, but are more often referred to as “rest.” Interest from reverse pension transactions and interest from repurchase transactions are recorded as interest or interest expense. As a result, while repo transactions have traditionally been used to control liquidity within the banking system to manage the overnight rate, they have been increasingly used in recent times for balance sheet management purposes.