Editing Repurchase agreement (section)

{{Short description|Form of short-term borrowing}}
{{Redirect|Repo|other uses|Repo (disambiguation)}}
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A '''repurchase agreement''', also known as a '''repo''', '''RP''', or '''sale and repurchase agreement''', is a form of secured short-term borrowing, usually, though not always using government securities as collateral. A contracting party sells a security to a lender and, by agreement between the two parties, repurchases the security back shortly afterwards, at a slightly higher contracted price. The difference in the prices and the time interval between sale and repurchase creates an effective interest rate on the loan. The mirror transaction, a "reverse repurchase agreement," is a form of secured contracted lending in which a party buys a security along with a concurrent commitment to sell the security back in the future at a specified time and price. Because this form of funding is often used by dealers, the convention is to reference the dealer's position in a transaction with an end party. Central banks also use repo and reverse repo transactions to manage banking system reserves. When the Federal Reserve borrows funds to drain reserves, it can do so by selling a government security from its inventory with a commitment to buy it back in the future; it calls the transaction a reverse repo because the dealer counterparty to the Fed is lending money. Similarly, when the Federal Reserve wishes to add to banking reserves, it can buy a government security with a forward commitment to sell it back. It calls this transaction a repo because the Fed counterparty is borrowing money.<ref>[see https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/repo-reverse-repo-agreements]</ref>

The repo market is an important source of funds for large financial institutions in the [[Shadow banking system|non-depository banking]] sector, which has grown to rival the traditional depository banking sector in size. Large institutional investors such as [[money market]] mutual funds lend money to financial institutions such as [[Investment banking|investment banks]], in exchange for (or secured by) [[Collateral (finance)|collateral]], such as Treasury bonds and [[mortgage-backed securities]] held by the borrower financial institutions.  An estimated $1 trillion per day in collateral value is transacted in the U.S. repo markets.<ref name = "NYT_WSBuzz">{{Cite web|url=https://www.nytimes.com/2019/09/18/business/fed-repo-rates.html|title=Wall Street is Buzzing About Repo Rates|work= [[The New York Times]]|author=Matt Phillips|date = 18 September 2019}}</ref><ref name="FRBNY_Repo"/>

In 2007–2008, a [[bank run|run]] on the repo market, in which funding for investment banks was either unavailable or at very high interest rates, was a key aspect of the [[subprime mortgage crisis]] that led to the [[Great Recession]].<ref name="Gorton_2009">{{Cite journal|url= https://www.nber.org/papers/w15223|title= Securitized banking and the run on repo|journal= NBER|author= [[Gary Gorton]]|date = August 2009|doi= 10.3386/w15223|s2cid= 198184332|access-date=26 October 2019|doi-access= free}}</ref> During September 2019, the U.S. Federal Reserve intervened in the role of investor to provide funds in the repo markets, when [[September 2019 events in the U.S. repo markets|overnight lending rates jumped]] due to a series of technical factors that had limited the supply of funds available.<ref name = "NYT_WSBuzz"/><ref name = "Fed_MPI">{{Cite web|url=https://www.federalreserve.gov/newsevents/pressreleases/monetary20191011a.htm|title=Statement Regarding Monetary Policy Implementation|work= [[Federal Reserve]]|date = 11 October 2019}}</ref><ref name="FRBNY_Repo"/>