What is a Repurchase Agreement?

A repurchase agreement is a transaction agreement to sell a type of security and to repurchase the security at a predetermined price in the future. The transactions conducted under the agreement are called repo transactions. Repo transactions are one of the means by which the central bank regulates the entire society's liquidity. When the central bank purchases securities held by commercial banks or securities brokers, the entire society's liquidity increases; conversely, when commercial banks or securities brokers repurchase the securities, the whole society's liquidity will return to Its original level. Central banks' securities repurchase transactions are generally short in term, usually within 15 days. Therefore, repurchase transactions are a means for the central bank to make short-term adjustments to the entire society's liquidity. Repo transactions may also occur between financial institutions and financial institutions, between financial institutions and non-financial institutions, and between non-financial institutions. At this time, the repurchase transaction is one of the means of financing short-term funds between various economic units. The subject matter of repo transactions is usually national bonds, especially short-term Treasury bills. ^[1]

Repurchase agreement

Financial assets in repurchase agreements are mainly securities. In developed countries, any asset can be repurchased as long as the supplier accepts it. China's repo agreement market transactions are generally divided into

The repurchase agreement method has the following characteristics:

The income of funds and

First, repurchase agreement borrowing is one of the beneficial tools for banks to implement debt reserve management, especially big banks prefer to use repurchase agreements to adjust

1. Repurchase agreement transactions help reduce market risk for traders.

2. Development

In 1969, the US federal government clearly stipulated in the law that the source of funds formed by banks using government bonds for repurchase agreements may not be subject to the statutory deposit reserve limit. This further promoted the active participation of banks in the repurchase agreement transactions, and focused the contents of the repurchase agreements on Treasury bills and local government bonds. Beginning in the 1960s, when the cloud of inflation began to envelope the entire Western world, the repurchase agreement market ushered in an unexpected golden age. With market interest rates soaring, most Western company finance executives are eager to find the right place to invest for the short-term funds in their hands. Enterprises' active participation in the repurchase agreement market has brought a large number of investors.

In addition to corporate and commercial banks, local governments at all levels in the United States have also become beneficiaries and active advocates of the repurchase agreement market. Because in accordance with the laws of the United States, the idle funds of local governments at all levels in the United States must be invested in government bonds or held in the form of bank deposits, and the integrity of the funds must be guaranteed. Previously, this greatly limited the financial flexibility of local governments. The repurchase agreement market provides an investment channel that invests in both government bonds and repayment guarantees. It is therefore not surprising that the government has become an active participant in this market.

Currently, the US repo market is the largest repo market in the world. As early as the early 1990s, the daily trading volume of overnight repurchase agreements had far exceeded US $ 10 billion. Mutual funds with hundreds of billions of dollars of short-term funds are the largest investors in this market. For them, it is common for managers of an investment fund to trade hundreds of millions of dollars in repo agreements through the same broker every day.