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A transaction exchanging securities for cash with an agreement to reverse the exchange later, economically providing secured short-term funding.
Save conceptA repurchase agreement, often shortened to repo, exchanges securities for cash with a commitment to reverse that exchange later. For the institution receiving cash, it is a way to obtain temporary funding without permanently selling the securities. The transaction has the economic effect of a loan secured by financial assets.
The agreement specifies the cash amount, the securities and the end date. The financing provider holds securities as protection while the other party uses the cash. A competitive central-bank auction may ask institutions to bid an and amount. The auction’s rules determine which requests receive funding and whether successful borrowers pay their own rates. must meet the provider’s eligibility requirements; having securities does not make every asset acceptable.
Imagine a bank that needs cash to complete payments today but expects funds to arrive shortly. In a hypothetical repo it supplies acceptable securities and receives cash for an agreed period. At the end it returns the cash plus the agreed financing cost and receives the securities back. If the terms require delivery before cash can be supplied, a delay in delivering the securities can also delay access to the money.
A central bank can use repos to supply while implementing its monetary-policy framework. The on an individual operation need not be the central bank’s . Repo also differs from a permanent securities purchase because the exchange is intended to reverse. Both parties remain exposed to operational and repayment risks, even though helps protect the provider of funding.