Repo operations

A repurchase agreement ("repo") is functionally a secured loan: the seller of a security receives cash today and commits to buy the security back on a set date at a pre-agreed higher price. The price differential implies an interest rate, the repo rate. The opposite leg, viewed from the cash lender's side, is called a reverse repo.

Repos sit at the core of modern money markets for two reasons. First, dealers, hedge funds, and banks use them to finance inventories of government bonds cheaply because the collateral lowers credit risk. Second, central banks use them as a primary tool of open market operations to steer short-term interest rates and manage banking-system liquidity.

• The U.S. Federal Reserve conducts repo and reverse repo operations through the New York Fed's trading desk; its Standing Repo Facility (SRF) and Overnight Reverse Repo Facility (ON RRP) set effective ceilings and floors around the federal funds target range.
• The European Central Bank runs main refinancing operations (MROs) and longer-term refinancing operations (LTROs) that are structurally repo transactions against eligible collateral.
• The Reserve Bank of India uses repo and reverse repo rates as its headline policy rates under the Liquidity Adjustment Facility.

Repo markets can also be a source of systemic stress. In September 2019, overnight U.S. repo rates spiked to roughly 10 percent, prompting the Fed to inject liquidity through large-scale repo operations. The 2007–2008 financial crisis featured a run on bilateral and tri-party repo markets when collateral values fell and haircuts widened, a dynamic Gary Gorton later described as a "run on repo."

For policy analysts, repo activity is a useful real-time indicator: persistent take-up at a central bank's reverse repo facility signals excess cash in the system, while elevated repo borrowing suggests funding stress.