anyone have infomation about The Repo Market ?
anyone have infomation about The Repo Market ?
The over-the-counter repo market is now one of the largest and most
active sectors in the US money market. Repos are widely used for
investing surplus funds short term, or for borrowing short term
against collateral. Dealers in securities use repos to manage their
liquidity, finance their inventories, and speculate in various ways.
The Fed uses repos to manage the aggregate reserves of the banking
system.
What are Repos?
Repos, short for repurchase agreements, are contracts for the sale and
future repurchase of a financial asset, most often Treasury
securities. On the termination date, the seller repurchases the asset
at the same price at which he sold it, and pays interest for the use
of the funds. Although legally a sequential pair of sales, in effect
a repo is a short-term interest-bearing loan against collateral.
The annualized rate of interest paid on the loan is known as the repo
rate. Repos can be of any duration but are most commonly overnight
loans. Repos for longer than overnight are known as term repos.
There are also open repos that can be terminated by either side on a
day’s notice. In common parlance, the seller of securities does a
repo and the lender of funds does a reverse. Because money is the
more liquid asset, the lender normally receives a margin on the
collateral, meaning it is priced below market value, usually by 2 to 5
percent depending on maturity.
The overnight repo rate normally runs slightly below the Fed funds
rate for two reasons: First a repo transaction is a secured loan,
whereas the sale of Fed funds is an unsecured loan. Second, many who
can invest in repos cannot sell Fed funds. Even though the return is
modest, overnight lending in the repo market offers several advantages
to investors. By rolling overnight repos, they can keep surplus funds
invested without losing liquidity or incurring price risk. They also
incur very little credit risk because the collateral is always high
grade paper.
Repos are not for Small Investors
The largest users of repos and reverses are the dealers in government
securities. As of August 2004 there were 22 primary dealers
recognized by the Fed, which means they were authorized to bid on
newly-issued Treasury securities for resale in the market. Primary
dealers must be well-capitalized, and often deal in hundred million
dollar chunks. In addition there are several hundred dealers who buy
and sell Treasury securities in the secondary market and do repos and
reverses in at least one million dollar chunks.