Repo Agreements

Question 1

What is a Repo?

Answer 1

A sale and repurchase agreement.

Question 2

How does a Repo work?

Answer 2

A sale of an instrument is made at the same time a contractual obligation is made to the buyer of the instrument that the seller will repurchase the instrument back at a set price at a future date.

Question 3

Is a Repo legally binding?

Answer 3

Yes for both buyer and seller.

Question 4

What is the Repo-Rate?

Answer 4

The percentage earned by the buyer between the start and end of the repo.

Question 5

How does the Repo-Rate work?

Answer 5

The amount paid by the buyer at the start of the repo will be less than the amount paid back from the seller at the end of the repo due to interest earned. This difference between the start and end of the repo is the Repo-Rate.

Question 6

How do Repos benefit the seller?

Answer 6

Seller gets short-term finance cheap because it’s securitised.

Question 7

How do Repos benefit the buyer?

Answer 7

Buyer receives the security which it can use to settle any obligations.

Question 8

What is a Reverse-Repo?

Answer 8

Essentially providing a short-term loan in return for a security.

Question 9

How are Repos used in the Government bond market?

Answer 9

DMO or GEM able to use reverse repos in order to cover short positions of Gilts.