Repo Market
The repo market is where institutions borrow cash short term by selling securities, usually government bonds, and agreeing to buy them back later at a slightly higher price. In effect it is a collateralised loan, and it is a core funding market for banks, dealers and funds.
Every day, trillions of dollars change hands overnight in the repo market. Dealers fund their bond inventories, money funds park cash and central banks steer rates — all through repurchase agreements. When this plumbing seizes up, as in 2008 or September 2019, markets everywhere feel it. This entry explains how repos work, who uses them and why spikes in repo rates matter.
- Category
- Bonds and Interest Rates
- Reading time
- 3 min
- Also called
- Repurchase agreement, Repo, Reverse repo
- Updated
The repo market in plain words
A repurchase agreement is an exchange of a security, which acts as collateral, for cash — in effect a collateralised loan.1
The lender provides cash to the borrower and receives a security as collateral, which is returned when the loan is repaid.1
Repurchase agreements are one of the building blocks of the shadow banking system.2
How a repo works, step by step
Borrower sells securities
Usually Treasuries. See Treasury Bills, Notes and Bonds.
Lender pays cash
Slightly less than the securities' value (a haircut).
Agreement to repurchase
Often overnight or a few days later.
Borrower buys back
At a slightly higher price.
The difference is interest
The repo rate.
Reverse repo
The same trade from the lender's side.
Worked examples
Example 1 — Overnight repo
≈ $13.9k interestA dealer borrows $100m overnight against Treasuries at a 5.0% annual repo rate.
| Interest for 1 day | $100m × 5% ÷ 360 ≈ $13,889 |
| Repurchase price | ≈ $100,013,889 |
The borrower exchanges securities for cash and buys them back at a slightly higher price — a collateralised loan.1
Example 2 — Haircut
≈ 2% haircutCollateral worth $102m is pledged for a $100m loan.
| Haircut | ($102m − $100m) ÷ $102m ≈ 2% |
Lenders ask for extra collateral to protect against price drops. See Haircut.
Example 3 — A repo spike
Funding stressOvernight repo rates jump from 2.2% to 8% in one day as cash becomes scarce.
| Jump | +5.8 points |
| Typical response | Central bank adds liquidity |
Sudden funding stress in repo can spread through markets that rely on short-term borrowing. See Shadow Banking.
Repo vs reverse repo
| Aspect | Repo | Reverse repo |
|---|---|---|
| You | Borrow cash | Lend cash |
| Securities | Give as collateral | Receive as collateral |
| Typical user | Dealers, hedge funds | Money funds, central banks |
| Earns/pays | Pays repo rate | Earns repo rate |
Who uses the repo market
Dealers
Funding bond inventories. See Market Maker.
Money market funds
Safe, short-term cash investments. See Money Market Fund.
Hedge funds
Leveraging bond trades. See Basis Trade.
Central banks
Steering short-term rates. See Open Market Operations.
Advantages and disadvantages
Advantages
- Cheap, secured short-term funding.
- Deep and liquid.
- Low risk for lenders thanks to collateral.
Disadvantages
- Prone to sudden funding stress.
- Encourages leverage.
- Collateral values can fall.
Going deeper
Read as far as you need. Each level builds on the one before it.
A secured loan
Beginner
Although structured as a sale and repurchase, a repo works like a loan backed by collateral.1
Benchmarks
Intermediate
Benchmark rates are built from repo trades: Canada's CORRA reflects overnight repo market activity.1 The US equivalent is SOFR.
Systemic role
Advanced
Because repo funds leveraged positions across the system, runs on repo were central to the 2008 crisis. See Credit Crunch.
Common mistakes
Thinking repo is a sale
Economically it's a loan.
Ignoring rollover risk
Overnight funding must be renewed daily.
Forgetting haircuts
They rise in stress.
Confusing repo and reverse repo
Check who lends the cash.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- A repo is a short-term loan backed by securities.
- The borrower sells and later buys back the securities.
- The price difference is the repo rate.
- Dealers, funds and central banks all use it.
- Repo stress can ripple through markets.
Frequently asked questions
Why do repo rates spike?
Is the repo market safe?
What is SOFR?
Further learning
- Shadow Banking
The wider non-bank system.
- Open Market Operations
Central bank use of repo.
- Treasury Bills, Notes and Bonds
The main collateral.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Corporate Finance Institute. Repurchase Agreement (Repo) (opens in a new tab) Checked .
- Corporate Finance Institute. Shadow Banking System (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.