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Repurchase Agreements
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)

Two simultaneous transactions in which a holder of securities sells securities to an investor with an agreement to repurchase them at a fixed price on a fixed date.  A reverse repo is the same transaction from the perspective of the lender.  The security buyer in effect lends the seller money for the period of the agreement, and the terms of the agreement are structured to compensate the buyer for this.  Dealers use repurchase agreements (repos) to finance their positions.  In effect, a repo is a short-term, collateralized loan from an investor to a dealer.  The Federal Reserve uses repos to supply reserves to the banking system and reverse repos to drain its reserves.

Repurchase agreements can be done on an overnight basis, for a fixed term, or on the basis of a continuing contract.  Fixed-term repos are usually made for less than 30 days.  When executed under a continuing contract, repo contracts usually contain a clause to adjust the interest rate on a day-to-day basis.  Interest rates on overnight repurchase agreements usually are lower than the federal funds rate by as much as 25 basis points.  The additional security provided by the loan collateral employed with repos lessens their risk relative to federal funds.  Repos are usually negotiated in large dollar amounts.

The use of repos became common after World War II among a few government security dealers and large money center banks.  Since the 1960s, the volume of transactions and the number of participants have grown substantially.  In 1985, the annual average volume of dealers amounted to $320 billion.  Repos have proved to be very popular cash management vehicles for individuals, firms, and governments with unpredictable cash flows.  Repos have been associated in recent years with widely publicized scandals involving the failure of government security dealers.  A publication of the Federal Reserve Bank of Atlanta concluded that losses to investors can be avoided if investors (1) operate under the terms of a clearly specified and executed master repurchase agreement, (2) properly assess counterparties including their corporate structure and capital strength, (3) use appropriate procedures for obtaining control of securities, and (4) evaluate securities appropriately and monitor them regularly, making margin calls when necessary.

Repurchase agreements have two major applications.

1.   Bonds are sometimes sold by one bank or investment house to another with the privilege of repurchase.  This transaction is tantamount to securing a loan equal to 100% of the collateral offered.  For instance, should an investment house desire to borrow funds with bonds as collateral, it may, instead of applying for a loan, arrange to temporarily sell them to a bank with an agreement to repurchase them at the same price at some specified future date - when the need for the funds has passed.  When such an agreement is concluded, the bank purchases the bonds outright at a flat price, or a flat price plus accrued interest, with an agreement to sell them back to the borrowing institution at the same price plus interest at a stipulated rate upon the expiration of a certain period.  The price agreed upon for purchase and resale is usually at or a few points below the prevailing market price.

Regulations of the Comptroller of the Currency authorize member banks to enter into repurchase or resale agreements only when the member bank concerned has the sole right or option under the agreement.

Appended is a typical form of bond repurchase agreement.

General Bond Repurchase Agreement


AGREEMENT MADE THIS DAY OF _______________________, 19 _____________ Between

________________________________________________________________________ Bank and


WHEREAS, in consideration of the agreement to purchase hereinafter expressed,

 ____________________ Bank has this day agreed to purchase from



at a price of __________________________________________________flat. 

The ______________________________________ Bank hereby agrees to resell said lot of bonds to the

__________________________________________ on or before 60 days from flat, plus interest on the purchase price at the rate of ___________________________________________ percent per annum, and the said _____________________________ hereby agrees to repurchase said lot of bonds from the ________________________________________ Bank on or before 60 days from the selling date, at the said price ____________________________________ flat, plus interest on the sale price at the rate of ________________________________________percent per annum.


THE _________________________________ BANK

By ________________________________________




2.       Member banks may borrow from a Federal Reserve bank through the instrumentality of a repurchase agreement, which, to all intents and purposes, is a collateral advance.  Eligible collateral is of four classes:  Treasury bonds, certificates of indebtedness, bankers' acceptances, and eligible commercial paper.

3.       The form of repurchase agreement used by Federal Reserve banks is appended.


Federal Reserve Repurchase Agreement


                                                                        New York , _________________________, 19_____

TO FEDERAL RESERVE BANK, _________________________________________________________

NEW YORK , N.Y. _________________________________________


The _____________________________ Bank hereby offers for rediscount for __________________ days from date the bills and/or notes which are listed on this application and agrees on _________________, 19, _______ to pay you the face value of the same which are thereupon to be released to us.  If such payment is not made on said date, you are hereby authorized to charge to our account the face value of said bills and/or notes and to hold them for collection for our account, subject to our order.


                                                                        ________________________________ Bank





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