An open pension contract (also called on demand) works in the same way as an appointment period, except that the trader and counterparty accept the transaction without setting the due date. On the contrary, trade can be terminated by both parties by notifying the other party before an agreed daily period. If an open deposit is not completed, it is automatically crushed every day. Interest is paid monthly and the interest rate is reassessed by mutual agreement at regular intervals. The interest rate on an open pension is generally close to the federal rate. An open repo is used to invest cash or finance assets if the parties do not know how long it will take them. But almost all open agreements are concluded in a year or two. The underlying guarantee for many repurchase transactions is in the form of government or corporate bonds. Equity exposures are simply deposits on shares such as common shares (or common shares). Some complications may arise due to the increased complexity of tax rules on dividends, unlike coupons. In mid-September 2019, two events coincided to increase the demand for liquidity: quarterly corporate taxes were due and this was the date of settlement of previously auctioned Treasury bills. The result is a significant transfer of reserves from the financial market to the state, which has led to a disparity between demand and supply of reserves.
But these two expected developments do not fully explain the volatility of the pension market. There are mechanisms built into the possibility of buyback agreements to reduce this risk. For example, many depots are over-secure. In many cases, a margin call may take effect to ask the borrower to change the securities offered when the security loses value. In situations where it seems likely that the value of the guarantee may increase and the creditor cannot resell it to the borrower, subsecured protection can be used to reduce risk. Pension transactions are generally considered safe investments because the collateral involved is considered collateral, which is why most agreements relate to U.S. Treasury bonds. Considered an instrument of the money market, a pension purchase contract is indeed a short-term loan, guaranteed by security and an interest rate. The buyer acts as a short-term lender, the seller as a short-term borrower. The securities sold are the guarantees. This will help achieve the objectives of both parties, namely the guarantee of financing and liquidity.
Although the transaction is similar to a loan and its economic effect is similar to a loan, the terminology is different from that of the loans: the seller legally buys the securities from the buyer at the end of the loan period.