# Repurchase Agreement

Source: https://www.yieldcurve.pro/learn/repurchase-agreement

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 is a collateralized loan: the seller borrows cash, the buyer lends cash, and the securities serve as collateral.

Repo is the plumbing of the Treasury market:

- **Dealers finance their inventory** through repo, borrowing cash overnight against their Treasury holdings
- **Short sellers borrow securities** through reverse repo, lending cash and receiving the securities they need to deliver
- **The Fed implements monetary policy** through repo operations, adding or draining reserves from the banking system

Key repo concepts:

- **General collateral (GC)**: the standard repo rate for any Treasury security. Typically tracks the Fed funds rate closely.
- **Special**: a repo rate below GC for specific high-demand securities (usually on-the-run issues). Going "special" means the security is in such demand that its borrower accepts a below-market interest rate.
- **Haircut**: the difference between the collateral's market value and the loan amount, protecting the cash lender against price declines.

The Lehman Brothers Repo Manual (reviewed on this site under [Papers](https://www.yieldcurve.pro/papers)) provides the definitive practitioner guide to repo mechanics, covering tri-party repo, fails, margining, and the role of repo in dealer financing.

The repo market's importance was highlighted during the September 2019 repo crisis, when overnight rates spiked to 10% due to reserve scarcity, forcing the Fed to intervene with emergency lending facilities.