What function does the "credit agreement" at a broker/dealer firm accomplish?
Answers
A broker/dealer firm is a firm engaging in trade of financial securities either by buying or selling on behalf of a customer account or for its own account. Broker-dealers are at the heart of the securities and derivatives trading process.
A credit agreement is a legally binding contract where the terms of a loan agreement are shown. The credit agreement outlines all of the terms and conditions associated with the loan.
The credit agreement can also be called the repurchase agreement, where the broker/dealer sells a security in exchange for funds through the Fed's discount window. The security is basically a collateral and the federal reserve charges an interest rate equivalent to the Fed's primary credit rate.
The benefit it provides to the dealer/broker is in form of interest rate that is charged to the person, this improves the ability of broker/dealers to access liquidity in the overnight loan market that banks use to meet their reserve requirements.