Key Takeaways
- A repurchase agreement (repo) is a short-term agreement to sell securities and repurchase them later at a slightly higher price.
- The party selling the repo is effectively borrowing whatever is traded for the securities, and the implicit interest paid is the difference in price from the initial sale to repurchase.
- Repos and reverse repos are for short-term borrowing and lending, often from overnight to 48 hours.
- The implicit interest rate on these agreements is known as the repo rate.
- The U.S. Federal Reserve uses repos and reverse repos to manage the money supply and influence short-term interest rates, a crucial part of the Fed's monetary policymaking.
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What Is a Repurchase Agreement?
Repurchase agreements, commonly known as repos, are short-term borrowing tools in government securities markets. A dealer sells securities, agreeing to buy them back at a higher price soon after. This transaction helps financial institutions manage cash and capital, with the implied interest rate being a key factor. The Federal Reserve has shaped repo market dynamics in recent years.
The dealer sells government securities to an investor, usually overnight, and buys them back the next day at a slightly higher price. The small price difference is an implicit overnight interest rate. Repos are typically used to raise short-term capital. They are also commonly used in central bank open market operations.1 During the early 2020s, the Fed made changes that massively increased the volume of repos traded, a trend it began to unwind in 2023.23
The party selling the security and agreeing to repurchase it later is involved in a repo. Meanwhile, the party buying the security and agreeing to sell it back is engaged in a reverse repurchase agreement or reverse repo.1
The language around repos gets abstract, even dry, very fast, but the daily work of finance is done through and with these (mostly) overnight flows. For anyone interested in the market, repos are a crucial indicator of the liquidity of the capital markets that run our economy.
How Repurchase Agreements Work
The Fed became more involved in the repo market in 2019. Establishing the Standing Repo Facility (SRF) in 2021 and the Overnight Reverse Repo Facility (ON RRP), which was officially adopted in 2015, has given it powerful tools for managing liquidity in American short-term funding markets.4
Repurchase agreements are considered safe because they use securities like Treasury bonds and mortgage-backed securities (MBSs) as collateral. Classified as a money market instrument, a repo is a short-term, collateral-backed, interest-bearing loan. The buyer acts as a short-term lender, while the seller is a short-term borrower.41
Repurchase agreements are made between various parties. The Fed uses repos to regulate the money supply and bank reserves. Individuals typically use them to finance the purchase of debt securities or other investments. Repurchase agreements are strictly short-term investments, and their maturity period is called the "rate," "term," or "tenor."1
Despite some similarities with collateralized loans, repos count as purchases. However, because the buyer only temporarily owns the security, these agreements are usually treated as loans for tax and accounting purposes.5 When there's a bankruptcy, repo investors can generally sell their collateral. This distinguishes repos from collateralized loans; bankrupt investors would be subject to an automatic stay for most collateralized loans.6
Example of a Repurchase Agreement
Suppose a bank needs a quick cash injection. It agrees with an investor, who offers to give the bank the money it needs as long as it's paid back quickly with interest. In the meantime, the bank also puts up Treasury bonds as collateral in return.
The bank sells the bonds to the investor, agreeing that it will repurchase them very soon at a slight premium. The Treasury bonds serve as collateral: The bank temporarily relinquishes control of the bonds for the cash it needs.7 Then, at a preset time, the bank gets them back by paying back the money it received plus a little extra.
Repurchase vs. Reverse Repo Agreements: Key Differences
A reverse repo agreement is a repurchase agreement seen from the buyer's perspective. Every trade has two parties: the buyer and the seller. Whether it’s a repo agreement or a reverse repo agreement depends on which side of the trade you are on.
It’s a repo transaction for the party initially selling the security, with the agreement to repurchase it, and a reverse repo for the investor buying the security under the stipulation of selling it back shortly.4
Financial institutions commonly use reverse repos as short-term lending. Central banks also use them to reduce the money supply. A repo can put money into the banking system, while a reverse repo can borrow money from the system when there's too much liquidity.8
For example, the Fed used repos to inject liquidity into the economy in 2020 at the height of the COVID-19 pandemic. It used reverse repos as part of its quantitative tightening in the years that followed.910
Term vs. Open Repurchase Agreements: Understanding the Time Frames
The major difference between a term and an open repo lies in the time between the sale and the repurchase of the securities.
Repos with a specific maturity date (usually the following day, though it can be up to a week) are term repurchase agreements.11 A dealer sells securities to a counterparty who agrees to repurchase them at a higher price on a given date. The counterparty holds the securities during the deal and earns interest from the difference between the sale price and the buyback price. The interest rate is fixed and paid at maturity by the dealer. A term repo invests cash or finances assets when the parties know how long they need.12
An open repurchase agreement or "on-demand repo" works the same way as a term repo, except the dealer and counterparty agree to the transaction without setting the maturity date. Instead, either party can end the trade by giving notice to the other before an agreed-upon deadline that arises daily. If an open repo isn't closed, it automatically rolls over into the next day. Interest is paid monthly, and the rate is periodically repriced by mutual agreement.13
The interest rate on an open repo is generally close to the federal funds rate.1415 An open repo is used to invest cash or finance assets when the parties don't know how long they will need to do so.16 But most open agreements conclude within one to two years.
Why the Tenor Matters in Repurchase Agreements
Repos with longer tenors, or terms, are riskier because more can happen before maturity, affecting repayment. The longer the tenor, the more time there is for interest rate fluctuations to influence the value of the repurchased asset.
This is similar to the factors that affect bond interest rates. Longer-duration bonds usually pay higher interest rates. Investors buy long-term bonds as part of a wager that interest rates won't rise substantially during the term. A tail event—a rare occurrence with a significant impact—is more likely to drive interest rates above forecast ranges over longer time spans. If there is a period of high inflation, the interest paid on bonds preceding that period will be worth less in real terms.
The same principles apply to repos. The longer the repo term, the more likely the collateral security's value will fluctuate before the repurchase. Business activities can affect the repurchaser's ability to complete the contract as well. Counterparty credit risk is primary in repos.
As with any loan, the creditor bears the risk that the debtor won't repay the principal. Repos function as collateralized debt—collateral reduces the total risk. And because the repo price exceeds the collateral's value, these agreements tend to be mutually beneficial.17
Different Kinds of Repurchase Agreements Explained
There are three main types of repurchase agreements:
Third-Party Repos
Third-party repos, or tri-party repos, are the most common. It involves three entities: a clearing agent or bank conducts the transaction between the buyer and seller, and protects their interests. It holds the securities and ensures that the seller receives cash at the onset, that the buyer transfers funds to benefit the seller, and that the securities are delivered at maturity. The clearing bank in the U.S. is Bank of New York Mellon (BK). While still a third-party service provider, JPMorgan Chase & Co. (JPM) ended its service as a clearing bank in 2018.18
In addition to taking custody of the securities involved, clearing agents also value the securities and ensure that a set margin is applied. They settle the transaction on their books and help dealers with collateral.19 However, clearing banks don't act as matchmakers: They don't find dealers for cash investors or vice versa, and they don't broker the deals.
Typically, clearing banks begin to settle repos early in the day, although they're not technically settled until the end of the day. This delay usually means that billions of dollars of intraday credit are extended to dealers daily. These agreements stood at about $3.1 trillion in September 2025 from BNY's platform out of the repurchase agreement market.20
Specialized Delivery Repo
Specialized repos have a bond guarantee at the beginning of the agreement and at maturity, along with the collateral. This type of agreement is uncommon.
Held-in-Custody Repo
In this kind of agreement, the seller gets cash for the security but holds it in a custodial account for the buyer. This type is even less common than specialized delivery repos because there is a risk that the seller may become insolvent and the borrower may not have access to the collateral.
Understanding Near and Far Legs in Repo Transactions
Repurchase agreements involve uncommon terminology. One common term is the “leg.” For instance, the part of the repurchase agreement in which the security is initially sold is sometimes called the “start leg,” while the repurchase that follows is the “close leg.”
These terms are also sometimes exchanged for “near leg” and “far leg,” respectively. The table below is a cheat sheet of terms often used when talking about repos.
Why the Repo Rate Is Important in Financial Markets
The Fed bank repurchases securities from private banks at a discounted rate, known as the repo rate. Like prime rates, repo rates are set by central banks.21 The repo rate system allows the Fed to control the money supply by increasing or decreasing available funds.
An increase in repo rates means banks pay more for the money they borrow from the central bank. This squeezes lenders' profits and increases interest rates on loans made to the public, although it also comes with higher APYs on savings accounts and other deposit accounts. This generally discourages people and businesses from taking out loans, which can cut consumer spending, business investment, and the amount of money circulating in the economy. This might be necessary if the central bank is attempting to tackle inflation.
A decrease in the repo rate has the opposite effect. It makes borrowing cheaper, resulting in more money being spent and moving around the economy. This can be helpful when central banks want to stimulate the economy.
To determine the costs and benefits of a repurchase agreement, a buyer or seller makes three different calculations:
- Cash paid in the initial security sale
- Cash to be paid for the repurchase of the security
- Implied interest rate
The cash paid for the initial security sale and for the repurchase will depend on the value and type of security in the repo. In the case of a bond, for instance, both will derive from the clean price and the value of the accrued interest for the bond.
A crucial calculation for any repo agreement is the implied rate of interest. If interest rates are unfavorable, a repo agreement may not be the most efficient way to access short-term cash. A formula that can be used to calculate the real rate of interest is below:
Interest rate = [(future value/present value) – 1] × year/number of days between consecutive legs
Once the real interest rate has been calculated, comparing the rate against other funding sources should reveal whether the repurchase agreement is a good deal. Generally, as a secured form of lending, repurchase agreements offer better terms than money market cash lending agreements. From the perspective of a reverse repo participant, the agreement can also produce extra income on excess cash reserves.
Assessing the Risks of Repurchase Agreements
Repurchase agreements are low-risk. The most significant risk in a repo is that the seller may fail to repurchase the securities at the maturity date. When this happens, the buyer may sell the security to recover the cash they paid.
This is risky since the security value may decline after the initial sale, and the buyer may have few options other than to hold onto the security, which they never wanted for this purpose. They can also sell it for a loss. The borrower is also at risk if the security value rises above the agreed-upon terms, and the creditor may not return the security.
Repurchase agreement risks can be mitigated. For instance, many repos are over-collateralized. If the collateral falls in value, a margin call will require the borrower to amend the securities offered. If it seems likely that the security value may rise and the creditor may not sell it back to the borrower, under-collateralization can be used to mitigate this risk.17
Generally, credit risk for repurchase agreements depends on many factors, including the terms of the transaction, the liquidity of the security, and the needs of the counterparties involved.
The Financial Crisis: Impact on the Repo Market
After the 2008 financial crisis, investors focused on a particular type of repo, known as repo 105. There was speculation that they played a part in Lehman Brothers’ attempts at hiding its declining financial health leading up to the crisis.22 During this time, the repo market in the U.S. and abroad shrank significantly, though it has since recovered and continues to grow.
The crisis revealed problems with the repo market in general. Since then, the Fed stepped in to analyze and mitigate systemic risk. It identified at least three areas of concern:22
- The tri-party repo market’s reliance on the intraday credit that the clearing banks provide
- A lack of effective plans to help liquidate collateral when a dealer defaults
- A shortage of viable risk management practices
Starting in late 2008, the Fed and other regulators established new rules to address these and other concerns. The new regulations increased pressure on banks to maintain their safest assets, such as Treasurys, giving them incentives not to lend them through repos.23
Despite these and other regulatory changes over the last decade, there are still systemic risks within the repo space. The Fed continues to worry that a default by a major repo dealer could inspire a fire sale among money funds, which would then negatively affect the broader market. The future of the repo space may involve continuing regulations that limit the actions of these transactors, or it may involve a shift toward a centralized clearinghouse system. For the time being, though, repurchase agreements remain an important means of facilitating short-term borrowing.4
Recent Developments in the Repo Market
Before the 2008 financial crisis, global repo markets were valued at several trillion dollars. The crisis caused a temporary contraction, but activity gradually recovered and has grown significantly in the years since.
By the 2020s, the Fed used repo and reverse repo agreements to help manage temporary liquidity swings and bank reserves after large asset purchases. Usage of the Fed’s reverse repo facility peaked in the early 2020s and declined by 2025, while the overall repo market remained very large.20
Until 2021, the Fed was a relatively minor player in repos, until increased activity put it at the center of the market. ON RRP agreements grew from about $1 trillion in assets in the spring of 2021 to $2.7 trillion by December 2022. By 2023, the repo market was about three times larger than at the beginning of 2021, with the Fed serving as the critical counterparty for most of these transactions.24
Surging Repo Volumes
The significant rise in repo volumes can be attributed to several prominent changes within the market and the broader economy.
The pandemic caused a rush for safe assets due to economic uncertainties. In July 2021, the Federal Open Market Committee (FOMC) established the Standing Repo Facility as a backstop in the money markets. It was meant to smooth liquidity in the repo market further and give a dependable source of cash in exchange for safe investments like government bonds.4 It soon became a crucial part of how major financial institutions across the U.S. managed their short-term liquidity needs. Meant as a supplement, it replaced much of the market.
Under the SRF, eligible institutions could borrow money overnight from the Fed, using securities like Treasury bonds as collateral. The interest rate on these loans, known as the repo rate, is set by the FOMC and is generally above the market rate. This ensures the SRF is used as a backstop rather than a primary funding source.25 The Fed's increase in bond holdings, a measure to improve market liquidity, was also part of its broader monetary policy to stabilize and support the economy.
However, from mid-2022 through 2023, the Fed wound down these holdings under a policy known as quantitative tightening, marking a shift from its earlier expansionary monetary stance.2627 Pulling back its efforts to support the economy (by this time, inflation was a critical worry), the Fed sought to decrease the size of its balance sheet.
Reducing the Fed's balance sheet mainly involves cuts in three crucial areas of its liabilities: U.S. Treasury deposits, bank deposits (known as reserves), and money market fund deposits at the Fed through the ON RRP.24 The size of its part in the repo market would be easier to cut, given that the Fed has less control over the other two.
As the Fed sought to decrease its balance sheet, ON RRP made the most sense to pull back. Although bank reserves played a vital role in future cuts to its balance sheet, scaling back the ON RRP is generally considered less disruptive to the monetary system than bank reserve cuts.
Economic uncertainty, the SRF, bond holdings, quantitative tightening, and regulatory changes increased the Fed's repo involvement. This resulted in the Fed becoming a critical counterparty in the repo market, with the market size tripling from the beginning of 2021 to 2023. Changes in the ON RRP should cause a move away from the Fed as a primary counterparty toward the private sector as its overnight repo sales continue downward.24
However, the private repo market's capacity to handle much higher volumes in the mid-2020s and beyond is in some doubt.2426 The Fed's active participation significantly increased the repo market's size, and it's unknown if the private sector could adjust to replace the Fed's increased role. The signs are positive: The first quarter of 2024 saw a return to May 2021 ON RRP levels (about $327 billion), with the private market absorbing the lost liquidity from the Fed, and in 2025, we saw near-record highs by July.28
Money market funds have been adjusting their strategies. As significant providers of cash to the repo market, they have increased their private repo lending volumes, especially above the ON RRP rates. That said, the jury is still out on whether the private markets can make up for the massive place the Fed filled in this area in the early 2020s.
Frequently Asked Questions (FAQs)
Who Benefits in a Repurchase Agreement?
In theory, all parties benefit in a repo agreement. The seller gets the cash injection it needs, while the buyer gets to make money from lending capital.
Who Buys Repurchase Agreements?
The sellers of repo agreements can be banks, hedge funds, insurance companies, money market mutual funds, and any other entity in need of a short-term infusion of cash. On the other side of the trade, the buyers are commercial banks, central banks, asset managers with temporary cash surpluses, and so on.29
Which Types of Securities Are Used in a Repo Agreement?
High-quality debt instruments with little risk of default are most commonly used, such as government bonds, corporate bonds, or mortgage-backed securities. The collateral needs to have a predictable value, reflect the loan's value, and be easy to sell if the loan isn't repaid on time. The collateral doesn't need to be debt. Other assets can be used, such as equity market indexes.30
The Bottom Line
A repurchase agreement (repo) is a financial instrument in which a dealer sells a security, such as a Treasury bond, and agrees to repurchase it at a higher price. This allows for short-term capital liquidity. The transaction effectively serves as a short-term collateral-backed loan with an implicit interest rate, known as the repo rate. Repos play a crucial role in financial markets by providing liquidity and facilitating monetary policy.
During the early 2020s, the Federal Reserve significantly increased its involvement in the repo market, especially during the pandemic, to stabilize the market and manage liquidity. In recent years, the Fed started reducing its repo involvement, encouraging the private sector to play a larger role. While repos are generally low-risk due to their collateralized nature, they are vital for understanding how short-term borrowing impacts overall economic liquidity.