A repurchase agreement (repo) is a short-term transaction in which one party sells securities to another with an agreement to repurchase them at a specified date and price. Economically, it functions as a collateralized loan: the seller borrows cash, the buyer lends cash, and the securities serve as collateral. The interest rate on that loan is the repo rate, expressed as an annualized percentage of the cash lent.
Repo is the plumbing of the Treasury market:
Key repo concepts:
The same transaction has two names depending on which side you sit on. A repo is a sale-and-repurchase from the cash borrower's perspective: a dealer sells Treasuries today and buys them back tomorrow, effectively borrowing cash and pledging securities as collateral. From the cash lender's perspective, that identical trade is a reverse repo: the lender advances cash and receives securities, then sells them back at maturity.
The Federal Reserve's reverse repo facility (RRP), operated by the NY Fed, is a tool for draining excess reserves from the banking system. In a RRP transaction, the counterparty lends cash to the Fed overnight and receives Treasuries as collateral. During 2021 through 2023, money market funds flooded the RRP facility, pushing the outstanding balance above 2.5 trillion at its peak in late 2022. That surge reflected the excess liquidity created by the Fed's 120 billion per month QE program begun in March 2020, combined with a RRP rate that offered a guaranteed risk-free return.
See /learn/primary-dealer for context on how the 24 primary dealers use repo to finance their Treasury inventory between auction settlement and onward distribution.
Haircuts protect the cash lender from a decline in collateral value between the trade date and the repurchase date. For U.S. Treasuries, typical haircuts are 0 to 2%, meaning the cash lender advances 98 to 100 cents on the dollar of market value. Agency MBS and investment-grade corporate bonds carry haircuts of roughly 5 to 10%. Structured products and lower-rated collateral command haircuts of 10 to 20% or higher.
During the 2008 financial crisis, haircuts on structured products widened sharply and rapidly. A collateral class trading at a 5% haircut in early 2007 might demand a 20 to 30% haircut by mid-2008. Because wider haircuts force borrowers to post more collateral per dollar of financing, they generate fire sales of the very assets being used as collateral. This dynamic created an effective bank run in the tri-party repo market, accelerating the collapse of several major broker-dealers.
GC repo tracks the Fed funds rate closely because both represent the cost of overnight dollar borrowing from a creditworthy counterparty secured by high-quality collateral. When GC consistently prices above Fed funds, the Fed reads it as a sign of reserve scarcity. When GC prices well below Fed funds, ample excess reserves are pushing money market rates to the floor.
The September 2019 repo spike illustrated reserve scarcity in stark terms. Overnight GC rates briefly touched 10% on September 16 and 17, driven by a coincidence of corporate tax payments, Treasury settlement demand, and a banking system with fewer excess reserves than regulators had assumed. The Fed resumed open market repo operations for the first time since the financial crisis to stabilize conditions.
On-the-run Treasuries regularly trade "special" in the repo market, with their repo rates running 2 to 10 basis points below GC. A larger on/off-the-run special spread signals particularly acute demand to borrow that specific security, often from short sellers covering a position or market makers needing to deliver. See /learn/on-the-run for how on-the-run status affects both cash prices and repo rates.
The Lehman Brothers Repo Manual, referenced under Papers, provides the definitive practitioner guide to repo mechanics, covering tri-party settlement, fails, margining, and dealer financing structures.
What is the difference between repo and secured borrowing?
Economically, repo and secured borrowing are identical: one party provides cash, the other provides collateral, and the borrower pays an interest rate for the term of the transaction. The legal form differs. In a repo, title to the securities transfers to the lender. In a secured loan, the borrower retains title and grants the lender a security interest. The title-transfer structure gives repo lenders stronger legal protection in a default, which is why dealers and money market funds prefer it over secured lending for short-term Treasury financing.
Why do some securities go "special" in repo?
A security goes special when demand to borrow that specific issue exceeds supply. The most common driver is short selling: a trader who shorts a Treasury must borrow it from someone, and that borrower accepts a below-GC repo rate in exchange for the loan of the security. On-the-run Treasuries, which are the most recently issued benchmark issues, are the most frequently shorted and therefore the most likely to trade special. The spread between the GC rate and the special rate represents the premium short sellers pay to borrow the most in-demand issues.