Long-Term Repo Operations (LTRO) and Tri-party Repo (TREPS)

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Long-Term Repo Operations (LTRO) and Tri-party Repo (TREPS) Blog Image

Overview:

Banks expect overnight rates to edge higher at the end of the month as advance tax and goods and services tax (GST) payments should cause liquidity shrinkage.

Why in news?

  • Credit demand and reversal of the Covid era’s targeted long-term repo operations (TLTRO) are also expected to suck cash out from the banking system.
  • Data show the weighted average rate in the tri-party repo system (TREPS) that also draws mutual funds participation has increased to 6. 70% on March 17, up from 6. 27% at the start of the month.

What are Long term repo operations?

  • LTRO is a tool that allows banks to borrow one to three years of funds from the Central Bank at the Repo rate.
  • It is called ‘Targeted’ LTRO if the Central Bank wants banks opting for funds under this option to be specifically invested in investment-grade corporate debt.
  • LTRO was first introduced by the European Central Bank (ECB) during its sovereign debt crisis that began in 2008.

What is Tri-party repo or TREPS?

  • Tri-party repo is a type of repo contract where a third entity (apart from the borrower or 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.”
  • The triparty repo is a financial market instrument like the market repo and not like the Central Bank repo (RBI’s repo).

 Eligible Tri-Party Agents are

  • All tri-party agents need authorization from RBI to act in that capacity before they commence operations.
  • Scheduled commercial banks are eligible to be tri-party agents.
  • Eligible collateral: Government Securities and Corporate securities.

 


Q1) What is Repo Rate?

Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.

Source: Banks expect a spike in overnight call money rates