Repo (Repurchase agreement)
A repurchase agreement (repo) is a sale of securities together with an agreement to buy them back at a set price on a later date. Economically it is a secured loan: the seller borrows cash, the buyer lends it and holds the securities as collateral, with the price difference representing the repo rate.
Roles that need it
What it is
In a repo, one party sells securities to another and agrees to repurchase equivalent securities at a fixed price on a set date or on demand. The party selling first is the cash borrower; for the other party the same trade is a reverse repo, a cash investment secured on securities. The difference between the sale price and the repurchase price is the interest, expressed as the repo rate.
Legal title to the collateral passes to the cash lender, which can reuse it, and the master agreement provides for margin calls if the collateral value changes. Repos can be bilateral, cleared through a central counterparty, or managed by a tri-party agent. A general collateral (GC) repo accepts any security from a set basket; a special repo targets one specific security.
Why it matters
Repo is the main market for secured short-term funding in Europe. Banks fund bond inventories with it, money market funds and corporate treasuries invest cash in it, and dealers borrow specific bonds to deliver on short sales. Central banks use repos to provide or absorb liquidity, and the Eurosystem collateral framework sets which assets they accept and at what haircut.
Because repos move large values daily, they matter for settlement, collateral and liquidity. Under the Securities Financing Transactions Regulation (SFTR), each repo must be reported to a trade repository by the next working day.
Worked example
Illustrative numbers. A bank needs 9,800,000 euro for 7 days. It sells government bonds with a market value of 10,000,000 euro to a fund, with a 2% haircut, so the cash lent is 10,000,000 x 0.98 = 9,800,000 euro.
The repo rate is 3.00% a year on an actual/360 basis. Interest is 9,800,000 x 0.03 x 7 / 360 = 5,716.67 euro. On day 7 the bank buys back the bonds for 9,805,716.67 euro.
If on day 3 the bonds fall in value to 9,700,000 euro, the collateral after haircut (9,506,000) no longer covers the loan, so the fund makes a margin call and the bank delivers more bonds or cash.
Who uses it
Treasury Operations Analysts settle repos and manage collateral and cash. Treasury Analysts use repo to fund positions and invest surplus cash. Securities Lending and Repo Analysts run the book and its lifecycle events. Collateral Management Analysts handle margin calls and substitutions. Liquidity Risk Analysts count repo funding and maturities in liquidity metrics. Trading Analysts price repos and track special rates.
Common confusions
A repo differs from securities lending: in a repo the motive is usually cash, and the security is collateral; in securities lending the motive is usually the security, and the fee is paid for it. Despite the legal sale, accounting under IFRS 9 usually keeps the securities on the seller’s balance sheet, with the cash shown as a liability. Finally, a sell/buy-back has the same economics as a repo but is documented as two separate trades.