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Part Of. Fiscal Programs. Monetary Policy Programs. International Stimulus Efforts. What Is a Repurchase Agreement? Key Takeaways A repurchase agreement, or 'repo', is a short-term agreement to sell securities in order to buy them back at a slightly higher price. The one selling the repo is effectively borrowing and the other party is lending, since the lender is credited the implicit interest in the difference in prices from initiation to repurchase.
Repos and reverse repos are thus used for short-term borrowing and lending, often with a tenor of overnight to 48 hours. The implicit interest rate on these agreements is known as the repo rate, a proxy for the overnight risk-free rate. Article Sources. Investopedia requires writers to use primary sources to support their work.
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Related Terms Term Repurchase Agreement Under a term repurchase agreement, a bank will agree to buy securities from a dealer and then resell them a short time later at a specified price. News Corp is a global, diversified media and information services company focused on creating and distributing authoritative and engaging content and other products and services. Dow Jones. Demos wsj. To Read the Full Story. Subscribe Sign In. In effect, the securities function as collateral for short-term loans.
Treasury auction purchases. Since the Repurchase Agreements Service was introduced in , it has rapidly outpaced all other products and accounts for the largest dollar volume of U.
Government securities trades processed through FICC. As a secured form of financing, repos offer dealers and other market participants more favorable terms than traditional money market cash lending transactions. Reverse repurchase agreements are used by institutions to earn income on their excess cash reserves. When the securities are sold, the sellers simultaneously agree to repurchase the securities on a specified day at a given price, including interest calculated using a rate agreed upon at the time the sale takes place.
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