A repurchase agreement (repo) is the sale of securities (usually government debt) tied to an agreement to buy the securities back later. A reverse-repo is the purchase of a security tied to an agreement to sell back later.

These agreements can be viewed as loans secured against the security. The effective interest rate is called the repo rate.

Which transactions are called repos and which are called reverse repos varies between markets. The transaction may be looked at from the point of view of a dealer dealing with a customer or vice verse. What is called a repo in one country may be called a reverse repo in another country.

Generally, whether an agreement is called a repo or reverse repo depends on which party initiates the transaction. In the UK, a repo between a dealer and the Bank of England or between a dealer and an individual investor is looked at from the dealers' perspective. If a retail investor buys securities from a dealer, the transaction is termed a repo as the dealer sells the security with the agreement to buy it back. Similarly the purchase by a dealer from the central bank it is called a reverse repo.

A central bank's repo rate is an important instrument of monetary policy, as the central bank is the lender of last resort. The repo rate in the UK is set by the MPC (Monetary Policy Committee of the Bank of England).

Copyright Graeme Pietersz © 2005-2020