Reverse repurchase, better known as Repurchase agreements (RPs or repos), a Sale and Repurchase Agreement has a borrower (seller/cash receiver) sell securities for cash to a lender (buyer/cash provider) and agree to repurchase those securities at a later date for more cash. The repo rate is the difference between borrowed and paid back cash expressed as a percentage.
Repurchase agreements (RPs or repos) are financial instruments used in money markets and capital markets. They are usually used to raise short-term capital. This is a way to borrow money and allow the securities to be held as collateral. Reverse repos occur most often in government securities, and often also in other securities that are highly valued and thus considered a good source of collateral.
Repos (in many respects), are hybrid transactions that combine features of both secured loans and outright purchase and sale transactions but do not fit clearly into any one classification.
Repurchase agreement and reverse repurchase agreement refers to a type of transaction in which a money market participant acquires funds which are immediately available by selling securities and simultaneously agreeing to repurchase the same or similar securities after a specified time at a given price, interest at an agreed-upon rate incurred. When viewed from the perspective of the supplier of the securities (the party acquiring funds) such a transaction is called a repo and a reverse repo or matched sale-purchase agreement when viewed from the point of the supplier of funds.
For the party selling the security (and agreeing to repurchase it in the future) it is a repo; for the party on the other end of the transaction (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement.
Examples of repo features that are characteristic of secure lending arrangements, are:
- The use of margin of haircuts in valuing repro securities
- The right to substitute collateral in term agreements
- The use of mark-to-market provisions
By contrast, the repo buyer's right to trade the securities during the term of the agreement represents a transfer of ownership that normally does not occur in collateralized lending arrangements.