Repo

A Repo, short for repurchase agreement, is issued for the purposes of short term borrowing and is used typically by institutions who trade government securities, such as discount notes or treasury bonds.  Repo's are essentially short term loans taken against collateral and used for a variety of reasons, including liquidity management and speculation.

The repurchase agreement is formed when one party sells, or puts up collateral for a loan, a security to another party and then agrees to buy it back at a predetermined future date and price.  In return, the "buyer", or lender of funds, of the security will receive interest payments for the use of their funds; this interest rate is commonly referred to as the "repo rate".

Most repo transactions are for overnight maturity, but can be of any duration.

Repo Transaction Example


The seller in this example is said to be doing a repo, while the lender of funds is said to be involved in a "reverse repo". 

Repo Transaction Example
 

Repo & The Fed

When used in the reference to the Federal Reserve's repo lending facility, the purpose is slightly different.  The federal reserve repo is basically lending money to increase the reserves of their member banks or decrease money supply in the case of a reverse repo.  Repo's are the Fed's most common form of open market operations and the Fed can get involved with temporary or permanent forms of money supply management.  Repo's are considered as a temporary means of managing liquidity as the bank will be forced to return the funds borrowed and receive their collateral back.  However, the Fed can engage in more permanent measures by actually buying some of these securities back from dealers and adding them to the Federal reserve portfolio.  This will permanently affect the available money supply.

The repo activity through the fed can have a term to maturity of overnight, up to 65 business days but usually less than 14 days.


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