Repurchase Agreement (Repo)
A short-term collateralized borrowing arrangement using securities sold with an agreement to repurchase.
What is Repo?
A repurchase agreement (repo) is a form of short-term borrowing in which one party sells securities to another and simultaneously agrees to repurchase them at a specified higher price on a future date — typically the next day (overnight repo) or within a few weeks. The difference between the sale price and the repurchase price represents the interest cost, expressed as the repo rate. Repos are functionally equivalent to collateralized loans: the seller is the borrower, the buyer is the lender, and the securities serve as collateral. The repo market is a critical part of the global financial system, providing daily liquidity to banks, broker-dealers, and money market funds. The Federal Reserve uses repo operations as a key monetary policy tool to control the federal funds rate.
Example
A broker-dealer that needs $500 million overnight to fund its securities inventory enters a repo with a money market fund. The dealer sells $505 million of U.S. Treasury securities and agrees to repurchase them for $500.069 million the next day — implying an annualized repo rate of approximately 5.0%. The money market fund earns a secured overnight return; the dealer gets the cash it needs. The Federal Reserve's overnight reverse repo facility conducted over $2 trillion in daily volume at peak usage in 2022–2023.
Source: Federal Reserve Bank of New York — Repo and Reverse Repo Agreements