Repurchase Agreement Definition & Meaning | Financial Term | CSIMarket
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Glossary

Repurchase Agreement

Financial Term

A repurchase agreement, also known as repo, is a financial transaction in which a borrower (typically a dealer or trader) agrees to sell securities to a lender (usually a bank or other financial institution) with a simultaneous agreement to buy them back at a later date and a higher price. The difference between the initial sale price and the repurchase price represents the interest or fee for the transaction.

Repos are commonly used in the financial industry for short-term borrowing and lending of cash or securities. Typically, banks and other financial institutions use repos to maintain their liquidity needs by borrowing cash in exchange for securities. On the other hand, dealers and traders use repos to finance their positions by borrowing securities in exchange for cash.

Repos are also used in the trading of government securities, such as treasury bills and bonds. The Federal Reserve Bank uses repos to implement monetary policy by conducting open market operations to buy or sell securities from or to its member banks for the purpose of managing the money supply.

Repos are often seen as a safe and reliable way to borrow or lend money because they are collateralized by securities, which act as a guarantee for repayment. This collateralization reduces the risk of default, making it an attractive funding option for banks and traders. However, like all financial transactions, repos carry some risk and should be used with caution.


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