Repo, Repurchase Agreement

<body onLoad="MM_checkPlugin('Shockwave Flash','','http://www.riskglossary.com/default_nofl.htm',false);return document.MM_returnValue" stylesrc="../_private/template.htm" bgcolor="#FFFFFF" link="#669933" vlink="#000000" alink="#000000"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table1"> <tr> <td width="740"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" height="37" id="table2"> <tr> <td height="35" width="100%"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table3"> <tr> <td width="100%" align="left" valign="top"> <p class="header_gold">Repurchase Agreement</td> <td width="45" align="right" valign="bottom"> <map name="FPMap6"> <area href="http://www.contingencyanalysis.com" shape="rect" coords="1, 0, 44, 11" target="_top"> </map> <img border="0" src="../images/home.gif" usemap="#FPMap6" width="45" height="12"></td> </tr> </table> </td> </tr> <tr> <td width="100%" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td width="0%" valign="top" bgcolor="#FFFFCC"> <table border="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" cellspacing="1" id="table4"> <tr> <td width="0%" align="left" valign="top"> <p class="header2_black">Explained:<br> <img border="0" src="../images/blank_1x100.gif" width="100" height="1"></td> <td width="0%" align="left" valign="top"><p class="word_list"> <a href="#repo">repo</a><p class="word_list"> <a href="#repo rates">repo rate</a><p class="word_list"> <a href="#repurchase agreement">repurchase agreement</a><br> <img border="0" src="../images/blank_1x160.gif" width="160" height="1"></td> <td width="100%" align="left" valign="top"><p class="word_list"> <a href="#Reverse repo">reverse repo</a><p class="word_list"> <a href="#special security">special security</a> <p class="word_list"> <a href="#term repos">term repo</a><br> <img border="0" src="../images/blank_1x160.gif" width="160" height="1"></td> </tr> </table> </td> </tr> </table> <table border="0" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111" width="310" align="left" id="table5"> <tr> <td width="300" height="14"><font size="2"> </font><font size="4"> </font></td> <td width="9" height="14"></td> </tr> <tr> <td width="300"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script>  </td> <td width="9"> </td> </tr> </table> <p class="body">A <b><a name="repurchase agreement">repurchase agreement</a></b> (or <b><a name="repo">repo</a></b>) is an agreement between two parties whereby one party sells the other a <a href="../articles/security.htm">security</a> at a specified price with a commitment to buy the security back at a later date for another specified price. Most repos are overnight transactions, with the sale taking place one day and being reversed the next day. Long-term reposcalled <b><a name="term repos">term repos</a></b>can extend for a month or more. Usually, repos are for a fixed period of time, but open-ended deals are also possible.<b> <a name="Reverse repo">Reverse repo</a></b> is a term used to describe the opposite side of a repo transaction. The party who sells and later repurchases a security is said to perform a repo. The other partywho purchases and later resells the securityis said to perform a reverse repo. </p> <p class="body">While a repo is legally the sale and subsequent repurchase of a security, its economic effect is that of a <a href="../articles/collateral.htm">secured loan</a>. Economically, the party purchasing the security makes funds available to the seller and holds the security as <a href="../articles/collateral.htm">collateral</a>. If the repoed security pays a <a href="../articles/common_stock.htm">dividend</a>, <a href="../articles/coupon_bond.htm">coupon</a> or partial redemptions during the repo, this is returned to the original owner. The difference between the sale and repurchase prices paid for the security represent interest on the loan. Indeed, repos are quoted as interest rates. </p> <p class="body"><a href="../articles/security.htm">Securities</a> dealers use repos to finance their securities inventories. They repo their inventories, rolling the repos from one day to the next. Counterparties may be institutions, such as money market funds, who have short-term funds to invest, or they may be parties who wish to briefly obtain use of a particular security. For example, a party may want to sell the security short, or they may need to deliver the security to settle a trade with another party. Accordingly, there are two possible motives for entering into a reverse repo:</p> <p class="bullet"><img border="0" src="../images/bullet.gif" width="20" height="10">short-term investment of funds, or</p> <p class="bullet"><img border="0" src="../images/bullet.gif" width="20" height="10">to obtain temporary use of a particular security. </p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="345" align="right" id="table6"> <tr> <td align="right" width="9" height="10"></td> <td width="336" height="10"> <font size="2"> </font></td> </tr> <tr> <td align="right" width="9"> </td> <td width="336"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script>  </td> </tr> </table> <p class="body">In the latter case, the security is called a <b> <a name="special security">special security</a></b>. In the former case, it is called general collateral or GC. </p> <p class="body">Interest rates payable on special repos tend to be lower than those payable on GC repos. This is because a party reverse repoing a special security will accept a reduced interest rate on its funds in exchange for receiving the special security it requires. Economically, the transaction is no different from cash collateralized <a href="../articles/securities_lending.htm">securities lending</a>. Pricing of either type of deal depends upon demand for the desired security.</p> <p class="body">Because repos are essentially secured loans, their interest rates do not depend upon the respective counterparties' <a href="../articles/credit_risk.htm">credit qualities</a>. For GC repos, the same rates apply for all counterparties. Accordingly, GC repo rates—or simply <b> <a name="repo rates">repo rates</a></b>—are benchmark short-term interest rates that are widely quoted in the marketplace. They differ from <a href="../articles/libor.htm"> Libor</a> rates in that they are for secured loans whereas Libor rates are for unsecured loans.</p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table7"> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Related Internal Links</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" colspan="2"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="6" id="table8"> <tr> <td width="100%"> <cop yrigh t( c)c ont i ngen cy anal y sis, 2 00 5> <p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/bankers_acceptance.htm">bankers acceptance</a> An acceptance that has a bank as its drawee.</p> <p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/certificate_of_deposit.htm">certificate of deposit</a> </strong>A money market instrument issued by a depository institution as evidence of a time deposit.</p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/collateral.htm">collateral</a> Assets held to secure an obligation.</p> <p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/commercial_paper.htm">commercial paper</a> Short-term promissory notes issued primarily by corporations.</p> <p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/custodian.htm">custody</a> The safekeeping of securities and related services.</strong></p> <p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/discount_instrument.htm">discount instrument</a> A money market instrument that pays no coupons, matures for its face value, and is issued at a discount to its face value.</strong></p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/fed_funds.htm">Fed funds</a> Deposits held by US banks in accounts at their regional Federal Reserve banks.</p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/hypothecation.htm">hypothecation</a> The posting of collateral.<p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/securities_lending.htm">securities lending</a> The lending of securities, usually for a fee. <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/short_sale.htm">short sale</a> Sale of a borrowed security.<p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/treasury_bill.htm">Treasury bill</a> US Treasury security with with a maturity of a year or less at the time of issue.<p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/treasury_securities.htm">Treasury security</a> US Federal Government debt obligation issued by the Department of Treasury.</p> </td> </tr> </table> </td> </tr> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Sponsored Links</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" width="75"> <img border="0" src="../images/ad_side_banner_1.jpg" width="103" height="285"></td> <td bgcolor="#FFFFCC" width="99%">  <p class="ad_legend" style="margin-left: 0; margin-bottom:2"> <a target="_top" href="http://www.riskexpertise.com/link/advertising.htm"> <font color="#000000">Ads by Contingency Analysis</font></a></p> <p style="margin-top: 0; margin-bottom: 0"> <iframe src="http://servedbyadbutler.com/adserve/;ID=147917;size=336x265;setID=82436;type=iframe" style="margin: 0px; padding: 0px; border-width: 0px" width="336" height="265" frameborder="0" marginwidth="0" marginheight="0" scrolling="no" name="I1"> <![if lt IE 4]> <script src="http://servedbyadbutler.com/adserve/;ID=147917;size=336x265;setID=82436;type=js" type="text/javascript"> </script> <noscript> <a href="http://servedbyadbutler.com/go2/;ID=147917;size=336x265;setID=82436"> <img src="http://servedbyadbutler.com/adserve.ibs/;ID=147917;size=336x265;setID=82436;type=img" border="0" height="265" width="336" alt=""></a> </noscript><![endif]></iframe>   </td> </tr> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Related Books</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" colspan="2"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="6" id="table9"> <tr> <td width="100%"> <p class="explanatory_text">Steiner (<a target="_blank" href="http://www.riskbook.com/link/steiner_r_(1997).htm">1997</a>) covers the repo and securities lending markets primarily from the broker-dealer standpoint. Fabozzi (<a target="_blank" href="http://www.riskbook.com/link/fabozzi_f_(1996)_securities_lending.htm">1996</a>) is a standard text primarily for institutional investors who might be interested in lend or repoing their investments. </p> <table border="0" cellpadding="4" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table10"> <tr> <td width="100" align="left" valign="top"> <map name="FPMap374"> <area target="_blank" href="http://www.riskbook.com/link/steiner_r_(1997).htm" shape="rect" coords="0, 0, 88, 124"> </map> <img border="0" src="../images/book_steiner_125.jpg" usemap="#FPMap374" width="89" height="125"></td> <td align="left" valign="top"> <table border="0" cellpadding="1" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table11"> <tr> <td width="90%" colspan="3"> <p class="title"> <a target="_blank" href="http://www.riskbook.com/link/steiner_r_(1997).htm"> Mastering Repo Markets</a></td> </tr> <tr> <td colspan="3"> <p class="author"><b>Robert Steiner</b></td> </tr> <tr> <td width="10%"><map name="FPMap371"> <area target="_blank" href="http://www.riskbook.com/main/ratings.htm" shape="rect" coords="0, 0, 89, 15"> </map> <img border="0" src="../images/star_5.gif" usemap="#FPMap371" width="90" height="16"></td> <td width="10%" class="author">quality</td> <td width="70%"> <p class="author"> </td> </tr> <tr> <td width="10%"><map name="FPMap39"> <area target="_blank" href="http://www.riskbook.com/main/ratings.htm" shape="rect" coords="0, 0, 89, 15"> </map> <img border="0" src="../images/tech_2.gif" usemap="#FPMap39" width="90" height="16"></td> <td width="10%" class="author">technical</td> <td width="70%">  </td> </tr> <tr> <td width="10%"> <p class="author">1997</td> <td width="10%"> </td> <td width="70%"> <p align="center"><map name="FPMap373"> <area target="_blank" coords="0, 0, 145, 19" shape="rect" href="http://www.riskbook.com/link/steiner_r_(1997).htm"> </map> <img border="0" src="../images/pointer_review.gif" usemap="#FPMap373" width="146" height="20"></td> </tr> </table> </td> </tr> </table> <table border="0" cellpadding="4" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table12"> <tr> <td width="100" align="left" valign="top"> <map name="FPMap367"> <area target="_blank" href="http://www.riskbook.com/link/fabozzi_f_(1996)_securities_lending.htm" shape="rect" coords="0, 0, 82, 124"> </map> <img border="0" src="../images/book_fabozzi_repo_125.jpg" usemap="#FPMap367" width="83" height="125"></td> <td align="left" valign="top"> <table border="0" cellpadding="1" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table13"> <tr> <td width="90%" colspan="3"> <p class="title"> <a target="_blank" href="http://www.riskbook.com/link/fabozzi_f_(1996)_securities_lending.htm"> Securities Lending and Repurchase Agreements</a></td> </tr> <tr> <td colspan="3"> <p class="author"><b>Frank J. 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