Treasury Repo

A repo (short for repurchase) transaction involves the sale of assets with an agreement to buy them back (repurchase) them on a specified future date (usually overnight, o/n) at a prearranged price. Think of it as a cash loan secured by collateral - the pawn shop analogy is accurate.

The exhibits above (source) are very basic models of the dollar flows in repo. The collateral (usually Treasury securities) flow in the opposite direction of cash. Like a pawn shop, the borrower sells his collateral, receives cash, and agrees to repurchase the collateral. If he fails to repurchase the collateral, the lender keeps it: hence, it is a secured loan. Also note that "cash lenders" can include all types of financial entities like the Fed, banks, money funds (MMFs), and asset managers.

The haircut represents the difference between the market value of the securities and the amount of cash or other collateral provided by the borrower. For example, if a Treasury has a market value of $100, and a 5% haircut is applied, the lender will only provide financing up to $95, providing a buffer against potential declines in the value of the collateral. The borrower, however, is expected to repurchase the collateral for $100 (or whatever the market value is).

Reverse repo (RRP) describes the role of the cash lender. The distinction between calling a transaction repo or reverse repo is tenuous, but normally described from the dealer's PoV. For example, dealers will repo (borrow) dollars from cash lenders like money funds, but will reverse repo (lend) those dollars to cash borrowers such as the Fed (at the overnight RRP facility) or hedge funds (on uncleared bilateral).

Repo transactions occur in four different "private" venues, and the differences can seem tenuous but only involve a third-party custodian bank to hold the collateral, and a central clearing service.

The size of dollar repo is estimated to be almost $4 trillion in daily volumes.

(If interested, we also have several videos on repos)