Repurchase Agreement Explained

Standardized Legal Documents Repurchase Agreement Explained

All You Should Know About a Repurchase Agreement

The purpose of legal documents and contracts is to support the agreements reached in verbal communication. They are a must in various situations, including the investment field. 

We’ll introduce you to the term repurchase agreement and explain its perks and drawbacks. If you are interested in trading in securities, you will find the answers to all your questions here! We will show you how to create legal documents in a snap by using DoNotPay’s customizable contract templates!

What Is a Repurchase Agreement?

A repurchase agreement is a contract that enables financial organizations—banks or dealers—to sell government securities to another company or investor and repurchase them later. The entity that buys the securities uses them as a guarantee or pledge, and it gets an interest from the seller when the transaction is reversed. 

This contract is popular in state or local government circles. Such documents act as a great substitute for the government-related investment pools or other money market assets. 

What Subtypes of Repurchase Agreements Are There?

Depending on the needs, parties can choose from different repurchase agreement subtypes that have different maturity periods. It’s a period after which the seller will purchase the securities back. The table below shows the most common subtypes:

Repurchase Agreement TypeDetails

Overnight

An overnight repurchase has a short maturity period—it ends the next business day. The interest rate is usually predetermined and unchangeable

Term

Using this subtype, the parties determine a specific maturity period that ranges from a few days to a few weeks. In most cases, these are short-term contracts, but the signing entities may prolong them to a few years if the investment propositions allow it. The interest rate is predetermined and unchangeable

Open

The signing entities don’t propose a contract end date. The agreement typically keeps renewing every day until one of the parties decides to stop it. The interest rate changes with each passing day

Tri-Party

This is the most common type of repurchase agreement. A tri-party organization—usually another bank or a clearing institution—acts as an intermediary between the signing entities. Its purpose is to make sure all the transaction requirements are met 

Flexible

The contracts belonging to this subtype are usually long-term and are closely related to certain capital programs

What Are the Benefits and Risks of Repurchase Agreements?

Below is another table showing typical advantages and disadvantages of repurchase agreements:

AdvantagesDisadvantages
  • Bearing in mind that the statute usually approves them and that the government agencies support them, repurchase agreements are safe
  • These agreements tend to give better results than the rest of money market investment assets
  • Such contracts are secured loans
  • Both parties can benefit from them
  • If the financial organization fails to repurchase the securities, the other party has the right to sell them to another entity, which protects them from financial losses
  • These contracts provide fast and easy liquidity
  • The government entity can close the repurchase agreement, preventing the bank or financial organizations from buying the securities back
  • The collateral may not have a satisfying level of liquidity or marketability
  • The contract value may not be enough to compensate the invested assets
  • If the counterparty’s business closes down, the lender loses principal and interests

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  1. Log in to DoNotPay in your preferred web browser
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  3. Enter the details you want to include in your contract

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