Repo and Reverse Repo

by Manshu on May 6, 2008

in Articles

Repurchase agreements are commonly referred to in the market as repos. This type of agreement involves someone owning a security that hasn’t yet matured. They can still use that security though as a type of collateral with a lender. They will be able to get the money they need now. They also agree to buy that security back at the cost of it plus interest. The rate of interest is variable and so it will depend on the market at that time.

This same concept is often referred to as a reverse repo when you are talking about the involvement of the entity that offers the funds. These are the lenders who willfully agree to buy them at this time and then resell them for face value plus interest at a later date. The terms are the same but a repo is from the view of the borrower while the reverse repo is from the view of the lender involved in the same transaction.

A repo and reverse repo are often associated with a type of secured loan. They are basically a way to have collateral that the lender can access should the recipient default as to the terms of the loan agreement. It significantly reduces the amount of risk that the lender has to carry. As a result they are often more willing to provide the borrower with the funds that they have requested.

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