Repo is short for "repurchase agreement". Those who deal in government securities use repos as a form of overnight borrowing. A dealer or other holder of government securities (usually T-bills) sells the securities to a lender and agrees to repurchase them at an agreed future date at an agreed price. They are usually very short-term, from overnight to 30 days or more. This short-term maturity and government backing means repos provide lenders with extremely low risk.
Repos are popular because they can virtually eliminate credit problems. Unfortunately, a number of significant losses over the years from fraudulent dealers suggest that lenders in this market have not always checked their collateralization closely enough.
There are also variations on standard repos:
- Reverse Repo
- the opposite of a repo, where a dealer buys government securities from an investor and then sells them back on a later date at a higher price.
- Term Repo
- the same as a repo except the term of the loan is greater than 30 days.