Repurchase agreement

An agreement with a commitment by the seller ( dealer) to buy a security back from the purchaser ( customer) at a specified price at a designated future date. Also called a repo, it represents a collateralized short-term loan, where the collateral may be a Treasury security, money market instrument, federal agency security, or mortgage-backed security. From the purchaser ( customer) perspective, the deal is reported as a reverse Repo. The New York Times Financial Glossary

* * *

repurchase agreement repurchase agreement ➔ agreement

* * *

   A repurchase agreement or Repo is a transaction in which Party A sells a security to Party B and agrees to repurchase it at a specific date in the future and at a pre-agreed price. Repos allow Party B to borrow securities and sell them short in the belief that they can be bought back in the market at a cheaper price by the time they must be returned to Party A. The advantage for party A is that it earns added income by lending the securities. Through this operation trader B is effectively a borrower of funds to finance further purchases of securities, and he pays interest to the holder, trader A. The rate of interest used is known as the repo rate. A reverse repo is the reverse situation, whereby the Party A agrees to buy securities from Party B and sell them back at a pre-agreed price and date. Party B is then effectively the lender of funds. Some central banks use repos and reverse repos in government debt as part of their money market operations.

* * *

repurchase agreement UK US noun [C] (also sale and repurchase agreement, also INFORMAL repo, repo agreement) FINANCE, STOCK MARKET

► an agreement to sell bonds, shares, etc. and buy them back at a later date: »

The issuer of a repurchase agreement must not fail to repurchase the underlying security within the specified time.

→ Compare REVERSE REPURCHASE AGREEMENT(Cf. ↑reverse repurchase agreement)