Editing Repurchase agreement (section)

== Risks ==
[[File:Repo SOFR.png|thumb|right|400px|Secured Overnight Financing Rate or SOFR, a proxy for the overnight repo interest rate. During September 2019, the SOFR significantly increased, resulting in intervention by the U.S. Federal Reserve.<ref name = "NYT_WSBuzz"/>]]

While classic repos are generally credit-risk mitigated instruments, there are residual credit risks. Though it is essentially a collateralized transaction, the seller may fail to repurchase the securities sold, at the maturity date. In other words, the repo seller defaults on their obligation. Consequently, the buyer may keep the security, and liquidate the security to recover the cash lent. The security, however, may have lost value since the outset of the transaction, as the security is subject to market movements. To mitigate this risk, repos often are over-collateralized as well as being subject to daily mark-to-market margining (i.e., if the collateral falls in value, a [[margin call]] can be triggered asking the borrower to post extra securities). Conversely, if the value of the security rises there is a credit risk for the borrower in that the creditor may not sell them back. If this is considered to be a risk, then the borrower may negotiate a repo which is under-collateralized.<ref name="NYconv">{{Cite web
 |url         = http://www.newyorkfed.org/research/epr/06v12n1/0605garb.pdf
 |title       = The Evolution of Repo Contracting Conventions in the 1980s
 |publisher   = [[Federal Reserve Bank of New York|New York Fed]]
 |author      = Kenneth D. Garbade
 |date        = 1 May 2006
 |access-date  = 24 September 2010
 |url-status     = dead
 |archive-url  = https://web.archive.org/web/20100411235137/http://www.newyorkfed.org/research/epr/06v12n1/0605garb.pdf
 |archive-date = 11 April 2010
}}
</ref>

Credit risk associated with repo is subject to many factors: term of repo, liquidity of security, the strength of the counterparties involved, etc.

Certain forms of repo transactions came into focus within the financial press due to the technicalities of settlements following the collapse of [[Refco]] in 2005. Occasionally, a party involved in a repo transaction may not have a specific bond at the end of the repo contract. This may cause a string of failures from one party to the next, for as long as different parties have transacted for the same underlying instrument. The focus of the media attention centers on attempts to mitigate these failures.

In 2008, attention was drawn to a form known as [[repo 105]] following the [[Bankruptcy of Lehman Brothers|Lehman collapse]], as it was alleged that repo 105s had been used as an accounting trick to hide Lehman's worsening financial health. Another controversial form of repurchase order is the "internal repo" which first came to prominence in 2005. In 2011, it was suggested that repos used to finance risky trades in sovereign European bonds may have been the mechanism by which [[MF Global]] put at risk some several hundred million dollars of client funds, before its bankruptcy in October 2011. Much of the collateral for the repos is understood to have been obtained by the [[rehypothecation]] of other collateral belonging to the clients.<ref>{{Cite news
| url= https://dealbook.nytimes.com/2011/11/03/as-regulators-pressed-changes-corzine-pushed-back-and-won/
| title= As Regulators Pressed Changes, Corzine Pushed Back, and Won
| work= [[The New York Times]]
| author= AZAM AHMED and BEN PROTESS
| date = 3 November 2011
| access-date=8 November 2011}}
</ref><ref>{{cite web
| url= http://www.ftseglobalmarkets.com/issues/issue-69-march-april-2013/rehypothecation-revisited.html
| title= Rehypothecation revisited
| publisher= ftseglobalmarket.com
| date= 19 March 2013
| access-date= 27 May 2013
| archive-date= 8 August 2014
| archive-url= https://web.archive.org/web/20140808051620/http://www.ftseglobalmarkets.com/issues/issue-69-march-april-2013/rehypothecation-revisited.html
| url-status= dead
}}</ref>

During September 2019, the U.S. Federal Reserve intervened in the role of investor to provide funds in the repo markets, when 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"/>