reverse repurchase agreement
The opposite side of a repo transaction — the party providing cash receives securities as collateral and agrees to sell them back at a higher price.
Example
“Money market funds park excess cash in reverse repos with the Fed, earning interest while holding Treasuries as collateral.”
Memory Tip
REVERSE REPO = you lend cash, receive securities as collateral. Fed uses these to drain liquidity.
Why It Matters
Understanding reverse repos helps you grasp how short-term lending works in financial markets, which affects interest rates and credit availability that ultimately influence your mortgage rates, savings account returns, and overall cost of borrowing money.
Common Misconception
Many people assume reverse repos are only for large institutions, but they actually influence the broader financial system that affects everyday consumers through changes in money market rates and the stability of banks that hold your deposits.
In Practice
If a money market fund has excess cash, it might lend $1 million to a bank for one day in a reverse repo, receiving Treasury bonds worth $1 million as collateral and agreeing to buy them back the next day for $1,000,500, earning a small return on the overnight transaction.
Etymology
REVERSE (opposite side of) REPURCHASE AGREEMENT. The mirror image of a standard REPO.
Common Misspellings
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See Also
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