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Understanding Repurchase Agreements

by Mark Stockley, Managing Director and Head of International Cash Sales, BlackRock

The repurchase agreement market is one of the largest and most actively traded sectors in the short-term credit markets and an important source of liquidity for money market funds and institutional investors. Repurchase agreements (also commonly referred to as repo agreements) are short-term secured loans frequently obtained by dealers (borrowers) to fund their securities portfolios, and by institutional investors (lenders) such as money market funds and securities lending firms, as sources of collateralised investment.

In this article, we look to explain the fundamentals of this important sector and provide insight into its usage and operation.

What is a repurchase agreement?

In its simplest form, a repurchase agreement is a collateralised loan, involving a contractual arrangement between two parties, whereby one agrees to sell a security at a specified price with a commitment to buy the security back at a later date for another specified price. In essence, this makes a repurchase agreement much like a short-term interest-bearing loan against specific collateral. Both parties, the borrower and lender, are able to meet their investment goals of secured funding and liquidity.