Central banks carry out different types of sales and repurchase transactions (reseaning operations) as part of the large-scale transactions they use to implement monetary policy. These are generally carried out with the aim of influencing liquidity and hence interest rates on the money market. A Purchase and Resale Contract (PRA) is the specific name given to one of these transactions when used by the Bank of Canada (BoC), with the intention of providing liquidity to the market. The BoC will make a follow-up operation, a buy-back and buy-back contract (SRA) – to strengthen money market conditions, not to make them easier. (As part of this transaction, the BoC will withdraw liquidity from the market by selling securities to banks.) 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. This agreed interest rate is called the pension rate. While many market participants conduct such transactions, it is usually only with certain banks in their domestic money markets, which are implemented in the short term, with the aim of implementing monetary policy. The BoC sets a target for the overnight interest rate as its key interest rate (used in its objective of targeting inflation). In a special purchase and resale contract (SPRA), boC will purchase securities from a certain type of bank (i.e. a primary trader in Canadian government bonds) with the agreement to resell them to that bank the next day. The BoC proposes to buy a fixed amount of securities at a fixed price, the prices being in the BoC`s objective for the day-to-day rate.
The result is a temporary injection of money (since banks receive payment of securities) on the money market, which contributes to improved liquidity and lower day market rates. This transaction will therefore be used when the BoC attempts to facilitate conditions on the domestic money market. The group has chosen to apply the fair value option to certain buyback and reverse-repurchase portfolios managed on a fair value basis.