A retirement activity, also known as pension, PR or sale and retirement, is a form of short-term borrowing, mainly in government bonds. The trader sells the underlying security to investors and, after consultation between the two parties, resells it shortly thereafter, usually the next day, at a slightly higher price. The term REPO is a contraction of the sale and repurchase agreement. This is a transaction in which two parties simultaneously agree on two transactions: a sale of securities for cash, followed by a redemption on a pre-agreed date and price. This operation is called “retirement”. 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. When public central banks buy securities from private banks, they do so at a reduced interest rate called the repo rate. Like policy rates, repo rates are set by central banks. The repo interest rate system allows governments to control the money supply within economies by increasing or reducing available resources.

A cut in repo rates encourages banks to sell securities for cash to the government. This increases the money supply available to the general economy. Conversely, by raising repo rates, central banks can effectively reduce the money supply by preventing banks from reselling these securities. 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. [14] 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. [15] The main difference between a maturity and an open repo is the time between the sale and redemption of the securities. Deposits with a given maturity date (usually the next day or week) are long-term retirement operations. A trader sells securities to a counterparty with the agreement that he buys them back at a higher price at a given time. In this agreement, the counterparty receives the use of the securities during the term of the transaction and receives interest which is expressed as the difference between the initial sale price and the redemption price. The interest rate is set and the interest is paid at maturity by the merchant.