Reverse Repurchase Agreement

A reverse repurchase agreement (repo) is a transaction in which a seller (the borrower) temporarily sells securities to a buyer (the lender) with an agreement to repurchase them at a higher price at a later date. The difference between the sale price and the repurchase price is the repo interest.

Repos are used by financial institutions to raise cash and manage their liquidity. They are also used to hedge against interest rate risk.

Repos are typically collateralized by U.S. Treasury securities or other high-quality assets. The collateral is held by the buyer of the securities in a trust account.

The repo market is a large and active market. In 2020, the total value of repo transactions was over $1 trillion.

Repos are considered to be a safe investment because the collateral is held by the buyer. However, there is still some risk involved, as the borrower could default on the agreement.

Repos are often used by hedge funds and other investors to finance their trading activities. They are also used by banks to manage their liquidity and to hedge against interest rate risk.

Repos are a complex financial instrument and there are a number of risks associated with them. Investors should carefully consider the risks before investing in repos.