TRI-PARTY REPO
Before we understand TRI – PARTY REPO , Let us first understand repo:
A repo is a sale of securities coupled with an agreement to repurchase the securities at a specified price on a later date. It is economically similar to a secured loan. The cash lender loans cash to a borrower and receives the borrower’s securities as collateral. The proceeds of the initial securities sale can be thought of as the principal amount of the loan, and the excess paid by the cash borrower to repurchase the securities corresponds to the interest paid on the loan, also known as the repo rate.
The principal + interest combined is basically the specified price at which the borrower agreed to repurchase the securities.
Tri-party repo is a type of repo contract where a third entity (apart from the borrower and lender), called a Tri-Party Agent, acts as an intermediary between the two parties to the repo to facilitate services like collateral selection, payment and settlement, custody and management during the life of the transaction.
RBI has given directions/guidelines regarding Tri-Party Repos in which Banks, NBFCs and various other financial institutions can participate (on both sides) and the securities can be Central Govt,, State Govt., Corporate bonds, debentures, Commercial Papers, Certificate of Deposits etc.
So the term ‘repo transactions’ may be used for market participants also, not specifically only for RBI. But ‘repo rate’ is used in the context of RBI lending to banks.
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