A bank repurchase agreement, commonly called a repo, is a short-term transaction in which one party sells a security and simultaneously agrees to buy it back on a set future date at a slightly higher price. The gap between the two prices is effectively interest, so the deal works like a very short-term collateralized loan even though it is legally structured as a sale. The U.S. repo market averaged roughly $12.6 trillion in daily exposures as of the third quarter of 2025, making it the single largest source of short-term funding in the financial system.1Office of Financial Research. Sizing the U.S. Repo Market Banks, broker-dealers, money market funds, and the Federal Reserve itself use it every business day to move cash.
The Two Legs of a Repo
Every repo has two legs. On the first, the party that needs cash (the seller) transfers a security to the party providing cash (the buyer), who wires the agreed purchase price. On the second, the seller repurchases the same security at a predetermined higher price. The price difference is the interest the buyer earns for parking cash temporarily.
A simple example makes it concrete. A bank sells $10 million in Treasury notes to a money market fund and agrees to buy them back the next morning for $10,001,389. The $1,389 difference is the interest payment. Annualized, that implied rate is the repo rate, which represents the seller’s borrowing cost and the buyer’s return on a secured overnight investment.
Legally, the transaction is a sale and repurchase, not a loan. The buyer takes actual legal title to the security for the life of the deal. Economically, though, it behaves as secured borrowing, and the accounting rules follow the economics rather than the legal form. This dual character matters because the sale structure gives the buyer strong protections in bankruptcy that an ordinary lender would not have.
Haircuts and Daily Margin
The buyer does not hand over cash equal to the full market value of the collateral. A protective discount called a haircut is applied. If a security is worth $100 million and the haircut is 2%, the buyer lends only $98 million. That buffer protects the buyer if the seller defaults and the collateral has lost value by the time it can be sold.
Haircut size depends heavily on the collateral. Over 60% of Treasury-collateralized repos carry a zero haircut, reflecting how liquid those securities are. For non-Treasury collateral the picture flips: roughly 69% of those repos carry haircuts above 2%.2Office of Financial Research. Are Zero-Haircut Repos as Common as Advertised Corporate bonds, asset-backed securities, and other less liquid collateral generally require haircuts of 5% or more.
For repos lasting more than one day, the collateral is revalued each business day. If the price drops and the cushion shrinks below the agreed threshold, the seller must deliver additional collateral or return some cash. That demand is a margin call. If the collateral appreciates significantly, the buyer returns the excess to the seller. Daily adjustments keep the margin roughly constant throughout the life of the deal.
Common Variations
Overnight and Term Repos
Most repos are overnight agreements, executed one afternoon and unwound the next business morning. Banks and dealers use them to square cash positions at the end of each day. Term repos run for a set period beyond one day, sometimes weeks or months. Because the cash is locked up longer, term repos involve more interest rate risk and demand tighter collateral management. They are useful when a dealer needs stable financing for a specific bond position rather than rolling overnight funding every morning.
Bilateral and Tri-Party Structures
In a bilateral repo, the seller and buyer deal directly and the buyer takes custody of the collateral. In a tri-party repo, a third-party custodian, typically a large clearing bank, sits between them. The custodian holds the collateral, handles settlement, calculates haircuts, and manages daily revaluations.3Office of Financial Research. Repo FAQ The tri-party structure also allows collateral substitution, letting the seller swap one security for another of equal value during the life of the deal.
The custodian’s role removes much of the operational burden. Instead of the buyer verifying each security’s eligibility and value, the agent does it automatically. That makes tri-party the default for high-volume, general-collateral transactions where the buyer cares about the overall quality of the collateral pool rather than any specific bond.
What Counts as Eligible Collateral
Not every security can back a repo. The commonly accepted categories include:
- U.S. Treasury bills, bonds, and notes, the most liquid and widely used, often at zero or near-zero haircuts.
- Treasury Inflation-Protected Securities (TIPS), on similar terms to other Treasuries.
- Agency mortgage-backed securities, both fixed- and adjustable-rate, from Fannie Mae, Ginnie Mae, and Freddie Mac.
- Government-sponsored enterprise debt from the Federal Home Loan Banks, Federal Farm Credit Banks, and similar agencies.
- STRIPS, where the interest coupons have been separated from the principal to create zero-coupon instruments.
These categories reflect what FICC’s GCF Repo service accepts for general collateral trading.4DTCC. GCF Repo Service Bilateral repos can accept a wider range by private agreement, including investment-grade corporate bonds and certain asset-backed securities, but those trades carry larger haircuts to compensate for lower liquidity.
Who Uses Repos, and Why
The two sides of a repo want different things. For sellers, the market offers cheap, reliable short-term funding. A bank holding $500 million in Treasuries can convert part of that portfolio into overnight cash to meet reserve targets or fund lending, without selling the bonds outright. Broker-dealers do the same to finance trading inventories. Because the borrowing is secured, the interest rate is typically lower than unsecured interbank lending.
For buyers, repos are a low-risk way to earn a return on idle cash. Money market funds are among the largest cash providers in the market. A fund sitting on $2 billion can lend it overnight against Treasury collateral and earn the repo rate with minimal credit risk. If the borrower defaults, the fund already holds the Treasuries and can sell them. Corporations with large treasury operations use repos the same way.
Standardized legal paperwork keeps transaction costs low. The Master Repurchase Agreement, published by the Securities Industry and Financial Markets Association, provides a pre-printed framework covering default remedies, margin maintenance, and netting rights, so counterparties do not renegotiate a contract for each trade.5SIFMA. MRA and GMRA Documentation
The Repo Rate and SOFR
The rate on any given repo reflects supply and demand for cash versus collateral that day, the creditworthiness of the counterparties, the quality of the collateral, and the term. In aggregate, repo rates trade near or within the Federal Reserve’s target range for the federal funds rate, because the Fed uses repo-based tools to anchor short-term rates.
The most important benchmark to come out of the repo market is the Secured Overnight Financing Rate, or SOFR. Published each business day by the Federal Reserve Bank of New York, SOFR is calculated as a volume-weighted median of actual overnight Treasury repo transactions. It draws on tri-party repo data, GCF Repo data, and bilateral Treasury repos cleared through FICC’s delivery-versus-payment service.6Federal Reserve Bank of New York. Secured Overnight Financing Rate Data SOFR replaced LIBOR as the primary reference rate for trillions of dollars in floating-rate loans, derivatives, and other financial contracts. A mortgage or corporate loan tied to SOFR is, at bottom, priced off conditions in the repo market.
How the Federal Reserve Uses the Repo Market
The Fed does not just observe the repo market; it participates directly to steer short-term rates. Two standing facilities anchor the system.
The overnight reverse repo (ON RRP) facility lets eligible institutions like money market funds deposit cash with the Fed overnight in exchange for Treasury collateral. The ON RRP rate functions as a floor under short-term rates.7Federal Reserve Bank of New York. Reverse Repo Operations No rational cash provider would lend in the private market at a rate below what the Fed offers risk-free, so the facility prevents rates from falling below the Fed’s desired range.
On the other side, the Standing Repo Facility (SRF), operational since 2021, provides a ceiling. Eligible counterparties can borrow overnight from the Fed against Treasury and agency collateral at the SRF rate. That limits upward pressure on overnight rates by ensuring a reliable funding source when private cash is scarce.8Federal Reserve Board. Standing Repurchase Agreement Operations Together the two facilities form a corridor that keeps the federal funds rate within the FOMC’s target range. The ON RRP facility runs on the same one-day cycle as most private repos.9Federal Reserve Board. Overnight Reverse Repurchase Agreement Operations
Where the Risks Sit
Counterparty and Collateral Risk
The most direct risk is that the seller defaults and never repurchases the security. The buyer’s first line of defense is the collateral itself, which it can sell to recover its cash, and the haircut provides extra cushion. But if the collateral has lost more value than the haircut covers, the buyer takes a loss even though the deal was secured. A $100 million security with a 2% haircut that drops to $95 million leaves the buyer $3 million short of the $98 million it lent. Collateral risk is most dangerous during broad market stress, when many securities lose value simultaneously and the same conditions causing defaults also erode the protection against them.
Repo Runs
Because most repo funding is overnight, borrowers must roll their positions every morning. If cash providers collectively refuse to renew, a dealer can lose its entire funding base in a single day. That is a repo run, and it played out on September 17, 2019, when a combination of corporate tax payments and Treasury settlement drained cash from the system faster than the market could absorb. SOFR spiked above 5%, and the effective federal funds rate jumped to the top of its target range. The Fed responded within hours, conducting an overnight repo operation that injected $53 billion, with additional operations totaling $75 billion offered each morning for the rest of the week.10Federal Reserve Board. What Happened in Money Markets in September 2019 The episode is why the Fed later made the Standing Repo Facility a permanent backstop.
The sheer size of the market means disruptions do not stay contained. When a major dealer cannot fund itself, it sells securities rapidly. Those fire sales push prices down, which impairs the collateral backing other dealers’ repos, which triggers more margin calls and more forced selling. That feedback loop is the systemic concern behind the push toward central clearing.
Bankruptcy Safe Harbors
One of the most consequential legal features of repos is their special treatment in bankruptcy. Ordinarily an automatic stay freezes creditors’ ability to collect against a debtor’s assets. Repos are carved out of that protection.
Section 559 of the Bankruptcy Code states that a repo participant’s right to liquidate, terminate, or accelerate a repurchase agreement cannot be stayed, avoided, or limited by the bankruptcy court.11Office of the Law Revision Counsel. United States Code Title 11 – Section 559 If a repo seller files for bankruptcy, the buyer can immediately liquidate the collateral without waiting for court approval. Section 362(b)(7) reinforces this by exempting repo setoff and netting rights from the automatic stay entirely.12Office of the Law Revision Counsel. United States Code Title 11 – Section 362
The protections exist for a functional reason. If buyers had to wait months or years for a court to release collateral, no rational lender would provide overnight cash against securities it might not be able to touch. The safe harbors keep repos functioning as near-cash instruments. The Code defines qualifying repos broadly, covering Treasuries, agency securities, mortgage-related securities, certificates of deposit, and certain foreign government obligations, with a maximum term of one year.13Office of the Law Revision Counsel. United States Code Title 11 – Section 101
The Coming Central Clearing Mandate
Historically most repos cleared bilaterally or through tri-party arrangements without a central counterparty guaranteeing both sides. That is changing. In December 2023, the SEC adopted amendments to Rule 17ad-22 requiring covered clearing agencies to mandate that their direct participants submit all eligible secondary-market Treasury transactions for central clearing.14U.S. Securities and Exchange Commission. SEC Extends Compliance Dates and Provides Temporary Exemption for Rule Related to Clearing of U.S. Treasury Securities
The compliance timeline has been extended by one year from the original dates. Eligible Treasury cash transactions must be centrally cleared by December 31, 2026, and eligible repo transactions by June 30, 2027.15U.S. Securities and Exchange Commission. Treasury Clearing Implementation In practice, the Fixed Income Clearing Corporation’s Government Securities Division will become the central counterparty for a much larger share of the market. FICC steps between buyer and seller and guarantees both legs, reducing the bilateral counterparty risk that can amplify stress events like the 2019 episode.
For market participants, more trades will need to flow through FICC’s infrastructure, which may raise clearing costs for firms that previously avoided central clearing. Regulators view the trade-off as worthwhile: a centrally cleared market is easier to monitor, nets exposures more efficiently, and reduces the chance that one firm’s failure cascades through the system.
How Repos Show Up on the Books
Despite their legal form as sales, most repos are recorded as secured borrowings. Under FASB ASC Topic 860, a repo is accounted for as a financing arrangement rather than a true sale when the securities to be repurchased are the same or substantially the same as those transferred, the repurchase price is fixed or determinable, and the repurchase agreement was entered into at the same time as the original transfer.16Financial Accounting Standards Board. Transfers and Servicing (Topic 860) Reconsideration of Effective Control for Repurchase Agreements Nearly every standard repo meets all three.
Under that treatment, the seller keeps the securities on its balance sheet and records a liability for the cash received. The buyer records a receivable rather than an investment in the securities. The difference between the sale price and repurchase price is recognized as interest expense for the seller and interest income for the buyer over the life of the agreement. The accounting aligns with the economic reality that both parties understand from the start: the securities are coming back, and the cash transfer is temporary.