Repo

Reverse transactions - or repos - are repurchase agreements whereby one party agrees to sell securities to a second party with the agreement that the original seller will repurchase the securities back at an agreed-upon date, and at a predetermined price.

Financial institutions make use of short-term repos - usually just on an overnight basis - to deal with temporary cash shortages. Typically, institutions buying repos will have assets held in various notes and bonds that they can offer as collateral. For the repo buyer, an overnight repo represents a means to access capital to meet a temporary shortage of cash. This most often results when a financial institution requires cash to process end-of-day transactions, and rather than liquidate holdings, it turns to the overnight lending market to obtain the funds needed to close the day's transactions.

For the seller, the repo agreement enables the lender to earn additional interest on its surplus cash. Typically, the interest earned in the overnight lending market exceeds interest earnings if the cash were simply held in a demand deposit account.