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Making Sense of Repo Markets
Repurchase agreement markets are a massive, but rarely noted, aspect of the financial system. In simple terms, repurchase agreements (repos) function like a pawnshop. Someone who has securities, such as US Treasurys, but needs short-term cash sells the securities to another party that has excess cash and agrees to repurchase the securities later at a higher price. This functions as a short-term loan. The securities act as collateral on the loan, while the interest on the loan, called a “haircut,” is represented by the difference between the selling price and the repurchase price. In another type of transaction, ... (full story)