Repurchase agreement
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Repurchase agreements (RP or Repo), are financial instruments used in the money markets. It is a transaction in which one party sells securities to another while agreeing to repurchase those securities at a future date.
Several terms refer to the same transaction: "Repurchase Agreement", "Repo", "Reverse Repo", and "Resale". A Reverse is a repo seen from the point of view of the other party to the transaction. Normally, both parties view the transaction from the trader's perspective. A trader looking to borrow money is transacting a repo, while a trader looking to obtain securities is executing a reverse repo. When a customer provides money to a trader in return for securities, the transaction is often termed a repo by both parties
A repo is similar to a secured loan, with the lender of money receiving securities as collateral to protect against default. The legal title to securities passes from the seller to the investor. The one providing the money is referred to as an "investor"; the provider of the collateral is the "seller". Coupons that are paid out on the securities during the life of the loan are transferred to the original owner of the security.
Under a repurchase agreement ("RP" or "repo"), the Fed buys government securities from a dealer who agrees to buy them back, typically within one to seven days; a reverse repo is the opposite.
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Why are repos transacted?
For the customer, a repo is an opportunity to invest cash for a custom period of time (other investments typically involve whole numbers of months). It is a short-term and secure investment; in return for investing, the customer receives collateral. Market liquidity for repos is good and yields are competitive for investors.
For the trader, repos are used to finance long positions and reduce funding costs of other speculative investments.
A repo is not strictly a trade but an agreement that is entered into.
Repurchase agreements initially add reserves to the banking system and then withdraw them; reverse repos initially drain reserves and later add them back.
What is the size of the repo market?
The US Federal Reserve and the European Repo Council (a body of the International Securities Market Association) both try to estimate the size of their respective repo markets. At the end of 2004, the US repo market reached USD 5 trillion and the European one passed EUR 5 trillion in outstandings. Both are growing at two-digit pace.
See also
External links
- Repurchase and Reverse Repurchase Transactions - Fedpoints - Federal Reserve Bank of New York (http://www.newyorkfed.org/aboutthefed/fedpoint/fed04.html)
- Instruments of the Money Market: Table of Contents (http://www.rich.frb.org/pubs/instruments/ch2.html)
- [1] (http://www.isma.org/content/surveys/repo.html)fr:Repo