The seller of the security who subsequently buys it back concludes a retirement contract; the buyer who then resells the security enters into a reverse retirement transaction. Notwithstanding its nominal form of sale and subsequent redemption of a security, the economic effect of a repurchase transaction is that of an insured loan. The main purpose of the loan is to reduce the creditor`s credit risk. If the debtor cannot pay, the creditor holds the security rights and can therefore claim, sell its ownership and thus compensate for the absence of cash inflows. In the event of default by the debtor without prior pledging, the creditor cannot be sure that he will be able to confiscate sufficient assets of the debtor. Because the mortgage makes it easier to obtain the debt and perhaps reduce its price; the debtor wants to mortgage as many debts as possible, but the isolation of the “good assets” for collateral decreases the quality of the rest of the debtor`s balance sheet and thus its solvency. A new loan is made when the creditor (a bank or broker dealer) reuses the debtor`s collateral (a client such as a hedge fund) in order to secure its own transactions and loans from the broker. This mechanism also allows leverage in the securities market. [2] Pledging is the practice in which a debtor mortgages security for the security of a debt or as a condition precedent of the debt or where a third party mortgages guarantees for the debtor.

A false letter is the usual instrument of pledging. After the collapse of Lehman, large hedge funds, in particular, became more cautious when it came to re-engaging their collateral and, even in Britain, they insisted on contracts that limit the amount of their assets that could be seized, or even prohibit the continuation of the seizure altogether. . . .