Repurchase Agreement

In a repurchase agreement, or repo, one party sells assets or securities to another and agrees to repurchase them later at a set price on a set date. Transactions where the securities are sold one day and bought back the next day are known as overnight repos. If the agreement is for a longer period they are known as term repos; they can sometimes last for a month or more. Agreements where securities are bought for resale later are known as reverse repos. Many central banks use repos and reverse repos in government debt as part of their open market operations. In a repo the repurchase price is slightly higher than the sale price; this is the interest on the loan. When expressed as an annualised percentage of the sale price it is known as the repo rate. Traders engaging in short-selling use reverse repos to acquire the securities they sell short.