Repurchase Agreement (RePo)

A Repurchase Agreement (RePo) is a short-term borrowing mechanism where one party sells an Asset, typically government Securities, to another party with the agreement to repurchase it at a specified future date and price. This transaction functions as a loan, with the Securities serving as Collateral.

In a RePo, the seller receives immediate cash, while the buyer holds the Securities temporarily. The repurchase price includes the original sale price plus an interest component, effectively making it a secured loan.

For example, if a bank sells $1 million in Treasury Bonds to a Financial Institution with a promise to buy them back the next day for $1.001 million, the Financial Institution earns interest on the loan, and the bank gets Liquidity for its needs.

In practice, RePos are commonly used by Financial Institutions for managing Liquidity, financing Inventory, or as a tool in monetary policy by Central Banks. During times of market stress, RePos can also be a vital source of funding for banks and other entities.