What are 'Purchase and Resale Agreements - PRAs'

Central banks conduct various types of sale and repurchase agreements (repo transactions) as part of the open market operations they use to implement monetary policy. These are typically undertaken with the intention to affect liquidity and therefore interest rates in the money market. A Purchase and Resale Agreement (PRA) is the specific name given to one of these operations when used by the Bank of Canada (BoC); its intention is to provide liquidity to the market.

BREAKING DOWN 'Purchase and Resale Agreements - PRAs'

Special Purchase and Resale Agreements (SPRAs) are overnight operations, but term Purchase and Resale Agreements (PRAs) are for longer time periods. Term PRAs have typically only been used during periods of market stress, and are not currently in use.

Generally, in a repo transaction, two counterparties will enter into an agreement whereby one will sell securities to the other and simultaneously agree to repurchase them at a specified later date at a fixed price. The securities can therefore effectively be regarded as collateral for a cash loan. The securities involved are usually 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 engage in such transactions, when central banks do so it is usually only with certain banks in their domestic money markets, on a short-term basis, and undertaken with the aim of implementing monetary policy.

In a term PRA, the BoC will buy securities from a specified type of bank (namely, a primary dealer in Canadian government securities) with an agreement to sell them back to that bank after a specified term, which could range up to a year. This gives a temporary injection of cash (as the banks receive the payment for the securities) into the money market, helping improve their liquidity and place downward pressure on market interest rates.

History of Purchase and Resale Agreements

The BoC first used term PRAs from December 2007, after Canadian money markets had tightened in the midst of global funding problems following the onset of the 2007 financial crisis; a brief determination that the situation had calmed was reversed in March 2008 when funding pressures again manifested, leading to the collapse of Bear Sterns. The BoC allowed PRAs to mature in June and July, only for the Lehman's collapse and near-bankruptcy of AIG to again impact the money market in September 2008 and again see PRAs used to help ease conditions. The final PRA matured in 2010.

RELATED TERMS
  1. Sale and Repurchase Agreement - ...

    Sale and Repurchase Agreement - SRA - is an open market operation ...
  2. Noon Rate

    The now-defunct noon rate was the Canadian Dollar-US Dollar exchange ...
  3. Investment Securities

    Investment securities are securities (tradable financial assets ...
  4. Trading Partner Agreement

    A trading partner agreement is an agreement drawn up by two parties ...
  5. Central Bank

    The entity responsible for overseeing the monetary system for ...
  6. Easy Money

    Easy money is when the Federal Reserve allows cash flow to build ...
Related Articles
  1. Investing

    The Money Market

    The money market provides a relatively stable place to park capital that may be needed within a short time horizon.
  2. Insights

    Not Crazy: Unconventional Monetary Policy

    Unconventional monetary policy, such as quantitative easing, can be used to jump-start economic growth and spur demand.
  3. Investing

    What is Reduced Bond Liquidity and Why Does it Matter Now?

    Reduced bond liquidity caused investor concern earlier in the year, but some signs point to a resurgence going forward.
  4. Investing

    Banks Take Extra $3.5 Billion Cash Ahead of Brexit

    As liquidity concerns grow for European banks heading into next week's Brexit vote, the Bank of England is holding additional Repo auctions to ensure banks have enough liquidity heading into ...
  5. Insights

    Fiscal Policy vs. Monetary Policy: Pros & Cons

    When it comes to influencing macroeconomic outcomes, governments have typically relied on one of two courses of action: monetary policy or fiscal policy.
  6. Investing

    Financial markets: Capital vs. Money Markets

    There are several key differences between capital markets and money markets as components of financial markets. Check out the similarities and differences between the two markets.
  7. Personal Finance

    How Banks Set Interest Rates on Your Loans

    Are you planning on getting a loan from bank? Here is the information you need know on how banks set the interest rates to get the best possible deal.
  8. Personal Finance

    Tesla Quietly Ends Car Buyback Program (TSLA)

    The company has silently scrapped the buyback program that guaranteed buyers of a resale value of the used cars after a period of three years
RELATED FAQS
  1. Who decides to print money in Canada?

    Discover how the Bank of Canada and chartered banks in the country can create new money, and how creating new money causes ... Read Answer >>
  2. How does monetary policy influence inflation?

    Take a deeper look at how contemporary central banks attempt to target and control the level of inflation through monetary ... Read Answer >>
  3. What are some examples of expansionary monetary policy?

    Learn about expansionary monetary policy and how central banks use discount rates, reserve ratios and purchases of securities ... Read Answer >>
  4. What are some examples of money market funds?

    Learn more about different types of money market mutual funds, including those that invest in government paper versus commercial ... Read Answer >>
  5. What economic indicators are important to consider when investing in the banking ...

    Find out which economic indicators are most useful for investors in the banking sector, especially those influenced by central ... Read Answer >>
Trading Center