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Repo Markets

Description and purpose

A repurchase agreement (Repo) is a financial transaction in which one party sells an asset to another party with an assurance to repurchase the asset at a pre-specified later date (a reverse repo is the same transaction seen from the perspective of the security buyer).

Repos can be overnight (duration one day) or term (duration up to one year), albeit some are up to two years and the majority are three months or less. 

The repo market enables market participants to provide liquidity to one another, and financial institutions predominantly use repos to manage short-term fluctuations in cash holdings, rather than general balance sheet funding.

Bilateral Repo – The bilateral repo market has investors and collateral providers directly exchange money and securities, absent a clearing bank. 

Tri-Party Repo – The tri-party repo market is named as such given the role played by clearing banks in facilitating settlement. Clearing banks act as an intermediary, handling the administrative details between the two parties in the repo transaction. This type of repo settlement is rarely used in Australia.


Market Participants

Cash Providers Securities Providers
Commercial Banks Security Lenders
Money Market Mutual Funds Hedge Funds / Leverage Accounts
Insurance Companies Central Banks
Corporations Commercial Banks
Municipalities Insurance Companies
Central Banks  
Security Lenders  

The Role of Repo in Financial Markets

  • An efficient source of short-term funding
  • Providing a more resilient money market
  • Providing a secure and flexible home for short-term investment
  • Facilitating Central Bank Operations
  • Financing leveraged investors and covering short investors
  • Hedging primary debt issuance
  • Supporting corporate bond investors
  • Ensuring liquidity in the secondary debt market
  • Fostering price discovery
  • Preventing market ‘squeezes’
  • Allowing more efficient collateral management