A reverse pension contract, or “reverse pension,” is the purchase of securities with the agreement to sell them at a higher price at any given time. For the party that sells the guarantee (and agrees to buy it back in the future), it is a buy-back (RP) or repo contract; for the other end of the transaction (purchase of security and consent to the sale in the future), it is a reverse repurchase agreement (RRP) or Reverse Repo. In a PRA clause, the BoC will purchase securities from a certain type of bank (i.e. a primary trader in Canadian government bonds) with an agreement to resell them to that bank after a certain maturity, which could be up to one year. The result is a temporary injection of money (since banks receive payment of securities) on the money market, which helps to improve liquidity and lower market interest rates. Interest from reverse pension transactions and interest from repurchase transactions are recorded as interest or interest expense. Reverse repurchase agreements (RRPs) are the end of a pension purchase agreement. These financial instruments are also called secured loans, buy-back/sale loans and loans for sale/buyback. An RRP differs from Buy/Sell Backs in a simple but clear way. Purchase/sale agreements document each transaction separately and provide a clear separation in each transaction. In this way, each transaction can be legally isolated, without the other transaction being fully feasible. On the other hand, the RRPs have legally documented every step of the agreement under the same treaty and guarantee availability and right at every stage of the agreement. Finally, the warranty in an RRP, although the security is essentially acquired, usually never changes the physical location or actual property.
If the seller is late to the buyer, the warranties must be physically transferred. Typically, two counterparties enter into an agreement in a repurchase transaction, under which one of the securities is sold to the other, while being repurchased at a fixed price at a specified later date. The securities can therefore indeed be considered as a guarantee for a cash loan. The securities concerned are generally fixed income securities and pricing is agreed in the form of interest rates.