Repo Market

  • Repo market is estimated to be approximately 3.4 Trillion
  • The repo market allows treasuries to become liquid money since they are often the asset being “sold”. This makes Treasuries fungible with bank deposits and therefore confers money creation powers upon the treasury.
  • Typical borrowers are dealers and investment funds borrowing through dealers
  • Lenders are money market funds
  • Fed has a Repo and Reverse Repo facility. The Reverse Repo allows the Fed to set a floor on repo rates since participants can always just earn interest from the Fed at that rate. The Repo facility places a soft cap on repo rates by providing loans at that rate.

Three markets:

  • Tri-party repo market are trades conducted at a clearing bank. The only US clearing bank is operated by the Bank of New York Mellon. The bank does the collateral valuation, securities custory, and payment settlement
  • Clear FICC repo is through the Fixed Income Clearing Corporation which serves as a counterparty to each side in the transaction.
  • Uncleared bilateral trades are those done without outside assistance between dealers and cash lenders. Usually players are very small or very large.

Repo Transaction

A repurchase transaction (repo) occurs when the borrower “sells” a security to a lender while agreeing to buy it back at a future date for a slightly higher price. The higher price will function as the “interest” on the loan. The repurchase “sale” will occur at below the asset’s market value to provide a further hedge for the lender against price moves1.

A Repo transactions allow actors (often hedge funds) to take on leverage by putting up a small amount of collateral for the short term loan


References

1.
Wang, J. J. Central Banking 101. (Joseph, 2021).