Repurchase/Reverse Repurchase Agreements
The first product covered in this section is the repurchase agreement, one of the fundamental instruments in the money markets. A repurchase agreement (or repo, as it is commonly known) is essentially an agreement to sell and repurchase a security. The actual repurchase of the security may come as soon as the next day or as far away as one or two years in the future. Repos can also be booked on an ‘open’ basis; that is, the transaction can be ‘rolled’ (rebooked) daily until one of the two parties involved decides to close it out. In a standard repo transaction the bank will sell its securities (perhaps Treasury notes) to a third party, while at the same time entering into a contract to repurchase them at some point in the future. Both sale and repurchase prices are agreed prior to entering the deal. In return for the securities, the bank will receive cash from the third party; the inflow of cash can be used to fund the balance sheet and a repo transaction is thus often thought of as a financing or a short-term, collateralised borrowing.
KeywordsCredit Risk Government Security Treasury Bill Additional Collateral Credit Quality
Unable to display preview. Download preview PDF.