What happens if the bonds used in the repo fall in value overnight?
When the Fed engages in a repo the bank (or securities dealer) on the other side – what is called the “counterparty” – agrees to repurchase the security at a fixed price regardless of what happens in the markets.4 It is these banks who reap the gains or suffer the losses from prices moving up or down. The only risk the Fed faces is that the counterparty in a repo goes bankrupt and can’t make good on the promise. Given that these are very large banks, and that the repos are very short term, this is an incredibly unlikely event.
