Special Purchase and Resale Agreement (SPRA)

What Is a Special Purchase and Resale Agreement?

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 commonly embraced with the expectation to influence liquidity and thusly interest rates in the money market. A Special Purchase and Resale Agreement (SPRA) is the specific name given to one of these operations when utilized by the Bank of Canada (BoC); its will likely lower interest rates.

Grasping Special Purchase and Resale Agreement (SPRA)

Generally, in a repo transaction, two counterparties will go into an agreement by which one will sell securities to the next and all the while consent to repurchase them at a predetermined later date at a fixed price. The securities can in this manner successfully be viewed as collateral for a cash loan. The securities included are typically 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 carry out monetary policy, or at least, to assist with guaranteeing interest rates in the money market arrive at the central bank's targeted rate.

The BoC sets a target for the overnight interest rate as its key policy rate (utilized in its goal of targeting inflation). In a Special Purchase and Resale Agreement (SPRA), 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 the next day. The BoC offers to buy a fixed amount of securities at a fixed price, with pricing being at the BoC's target for the overnight rate. This gives a transitory injection of cash (as the banks receive the payment for the securities) into the money market, further developing liquidity and lower overnight market interest rates. This operation will, hence, be involved when the BoC is attempting to ease conditions in the domestic money market.

The BoC will participate in a conclusion operation — a Sale and Repurchase Agreement, or SRA — when its aim is to fix as opposed to ease conditions in the money market. (In this operation, the BoC will pull out liquidity from the market by selling securities to banks.)