Purchase and Resale Agreements (PRAs)

What Are Purchase and Resale Agreements?

Central banks conduct different types of sale and repurchase agreements (repo transactions) as part of the open market operations they use to execute monetary policy. These are ordinarily attempted with the goal to influence liquidity and subsequently interest rates in the money market. A Purchase and Resale Agreement (PRA) is the specific name given to one of these operations when utilized by the Bank of Canada (BoC), with the goal to give liquidity to the market.

Figuring out Purchase and Resale Agreements (PRAs)

Special Purchase and Resale Agreements (SPRAs) are overnight operations, however term Purchase and Resale Agreements (PRAs) are for longer time spans. Term PRAs have regularly just been utilized during periods of market stress, and are not at present being used.

Generally, in a repo transaction, two counterparties will go into an agreement by which one will sell securities to the next and at the same time consent to repurchase them at a predetermined later date at a fixed price. The securities can thusly successfully be viewed as collateral for a cash loan. The securities included are normally fixed-interest securities, and pricing is agreed in terms of interest rates. This agreed-upon interest rate is termed the repo rate. While many market participants participate in such transactions, when central banks do so it is generally just with certain banks in their domestic money markets, on a short-term basis, and embraced determined to execute monetary policy.

In a term PRA, the BoC will buy securities from a predefined type of bank (in particular, a primary dealer in Canadian government securities) with an agreement to sell them back to that bank after a predetermined term, which could run as long as a year. This gives a brief injection of cash (as the banks receive the payment for the securities) into the money market, working on their liquidity and place descending pressure on market interest rates.

History of Purchase and Resale Agreements

The BoC previously utilized term PRAs from December 2007, after Canadian money markets had fixed amidst global funding issues following the beginning of the 2007 financial emergency; a concise determination that the situation had quieted was switched in March 2008 while funding pressures again showed, leading to the collapse of Bear Sterns. The BoC permitted PRAs to mature in June and July, just for the Lehman's collapse and close bankruptcy of AIG to again impact the money market in September 2008 and again see PRAs used to assist with facilitating conditions. The last PRA matured in 2010.