What is a Repurchase Agreement?
Also known as a repo agreement, a repurchase agreement is a strategy for acquiring a loan from a lender that involves the sale and repurchase of an asset or security. Essentially, the lender agrees to make the loan, with the understanding that the debtor will sell the lender the security. At an agreed upon later date, the debtor will regain control of the security, once the loan is repaid in full. In the actual process, repurchase agreements function a great deal like any cash loan transaction, but adds on the basic approach that is involved with executing a forward contract. Funds are transferred from the lender to the borrower. Simultaneously, the borrower transfers ownership of the security to the lender. The settlement date identified in the dual transaction also functions as the maturity date for the loan. During the time that the lender has control of the security, he or she earns interest on the transaction. The actual amount of interest is calculated by determining the differen
An agreement by which, for example, the Federal Reserve purchases a security for immediate delivery and receives interest at a specific rate from a government securities dealer, with an agreement to sell the security back at the same price by a specific date (usually within 15 days). This arrangement allows the Federal Reserve to inject reserves into the banking system on a temporary basis to meet a temporary need and to withdraw these reserves as soon as that need has passed. – Federal Reserve Board San Francisco What does this mean? Under a repurchase agreement (“RP” or “repo”), the Federal Reserve (Fed) buys US Treasury securities from a dealer who agrees to buy them back, typically within one to seven days; a reverse repo is the opposite. Actually, there is a slight variation in terminology for the repurchase agreements in which the Fed is one of the transacting parties. What is known as a repo is called a matched sale, while would otherwise be called a reverse repo is called a sys
