A reverse repurchase agreement is a short-term transaction in which one party lends cash to another and receives securities as collateral, with the borrower agreeing to buy those securities back on a set future date at a slightly higher price. The price difference is the interest the cash lender earns. It’s the mirror image of a repurchase agreement, or “repo”: the borrower’s repo is the lender’s reverse repo, one deal seen from opposite sides of the table.
These transactions are one of the safest ways for large institutions to park cash overnight or for a few weeks, and they sit at the center of the U.S. money markets.
How the Transaction Works
Every reverse repo has two legs. On the first leg, the cash lender wires funds to the borrower and takes delivery of securities as collateral. On the second leg, on the pre-agreed closing date, the borrower buys those securities back at a higher price. That price differential is the lender’s return, expressed as an interest rate called the repo rate.1Federal Reserve Bank of Richmond. Repurchase and Reverse Repurchase Agreements
In the U.S., repo rates use an Actual/360 day-count: interest accrues over the actual number of calendar days the deal is outstanding, divided by a 360-day year. Lend $10 million overnight at a 4% repo rate and you earn $10,000,000 × 0.04 × (1/360), or roughly $1,111 in interest.
The sale-and-repurchase structure isn’t cosmetic. Because the cash lender legally owns the collateral for the life of the deal, a borrower default doesn’t require foreclosing on a pledged asset; the lender already holds the securities and can sell them.
Overnight, Term, and Open
Most reverse repos backed by Treasuries settle overnight, meaning the closing leg happens the next business day. Term reverse repos run longer, with standard maturities of one, two, or three weeks and one, two, three, or six months. Open reverse repos have no fixed end date and roll forward daily until either side terminates them.1Federal Reserve Bank of Richmond. Repurchase and Reverse Repurchase Agreements
Haircuts
The cash lender protects itself by applying a haircut: it pays slightly less cash than the securities are worth at market price. If the collateral drops in value before the deal closes, the lender still has enough to cover what it lent. In the tri-party market, Treasury collateral typically carries a haircut of about 2%.2Federal Reserve Board. Proportionate Margining for Repo Transactions
Bilateral Treasury deals often work differently. About 70% of Treasury transactions in the non-centrally cleared bilateral market carry no haircut at all, reflecting the deep trust between established counterparties and the near-zero credit risk of U.S. government debt. Some bilateral deals even have negative haircuts, where the cash lender pays more than the collateral’s market value.2Federal Reserve Board. Proportionate Margining for Repo Transactions
Riskier collateral demands a larger haircut. Corporate bonds and mortgage-backed securities carry bigger cushions than Treasuries because their prices are more volatile and their credit quality is lower.
Tri-Party vs. Bilateral
Reverse repos settle in one of two structures, and the difference shapes how much work each side does.
In a bilateral repo, the counterparties handle everything themselves. They agree on specific securities down to the individual CUSIP number, and each party’s custodian bank manages clearing and settlement. The cash lender takes full control of the collateral and can reuse it in other transactions. The flexibility comes with higher operational overhead and the risk of a settlement fail on the closing leg if the lender doesn’t return the securities on time.3Federal Reserve Bank of New York. Reference Guide to U.S. Repo and Securities Lending Markets
In a tri-party repo, a clearing bank sits between the two sides as an agent, handling settlement, custody, collateral valuation, and picking which specific securities satisfy the collateral requirements. The cash lender typically agrees to accept any securities within a broad asset class, like “U.S. Treasuries,” rather than specific issues. Securities posted in a tri-party deal cannot be repledged outside the tri-party platform, which protects the borrower against settlement fails on the closing leg.3Federal Reserve Bank of New York. Reference Guide to U.S. Repo and Securities Lending Markets
Tri-party is generally cheaper and more efficient for large-scale participants because the clearing bank’s technology absorbs the operational load. Bilateral gives the cash lender more control over collateral selection and the ability to reuse those securities elsewhere.
What Counts as Collateral
The safety of a reverse repo depends almost entirely on what backs it. U.S. Treasuries are the standard because they carry no credit risk and are extremely liquid. Agency debt from entities like Fannie Mae and Freddie Mac is also widely accepted. Some deals use investment-grade corporate bonds or agency mortgage-backed securities, though these require larger haircuts.
Government money market funds, which are among the largest cash lenders in this market, face strict collateral rules under SEC regulations. A government money market fund must invest at least 99.5% of its total assets in cash, government securities, or repurchase agreements fully collateralized by government securities and cash.4eCFR. 17 CFR 270.2a-7 – Money Market Funds
Who’s on Each Side
Cash lenders in the reverse repo market are institutions with large pools of short-term cash that need to earn a return while staying immediately accessible: money market funds first and foremost, along with banks, insurance companies, and corporations sitting on temporary surpluses.
On the borrowing side, the main players are investment banks and securities dealers who need to finance their inventories of bonds. A dealer holding several billion dollars in Treasuries doesn’t fund that position out of its own capital; it borrows most of the cash through repos, pledging the securities as collateral. That financing function is what keeps bond markets liquid. Cash flows from institutions that have too much of it to institutions that need it, and high-quality securities move in the other direction as insurance.
The Fed’s Overnight Reverse Repo Facility
The Federal Reserve runs its own reverse repo operation, the Overnight Reverse Repurchase Agreement facility, known as the ON RRP. When the Fed conducts an ON RRP operation, it sells securities to an eligible counterparty and agrees to buy them back the next day at a higher price. The counterparty’s cash sits on the Fed’s balance sheet overnight rather than circulating in the financial system.5Federal Reserve Board. Overnight Reverse Repurchase Agreement Operations
The facility’s job is to put a floor under short-term interest rates. If the Fed offers a risk-free overnight rate to eligible counterparties, no money market fund will lend to a private counterparty for less. That keeps rates from falling below the Federal Open Market Committee’s target range even when the system is flush with cash. As of late March 2026, the ON RRP offering rate is 4.25%.6Federal Reserve Bank of New York. Reverse Repo Operations
Eligible counterparties include money market funds, government-sponsored enterprises like the Federal Home Loan Banks, and primary dealers. Each faces a daily cap of $160 billion.7Federal Reserve Board. Money Market Fund Repo and the ON RRP Facility Commercial banks generally don’t use the ON RRP because they earn interest on reserve balances (IORB) directly at the Fed, which plays the same floor-setting role for them.5Federal Reserve Board. Overnight Reverse Repurchase Agreement Operations
ON RRP usage swung dramatically in recent years. During 2022 and 2023, daily takeup regularly exceeded $2 trillion as quantitative easing left non-bank institutions with more cash than they could deploy elsewhere at attractive rates. By late March 2026, daily usage had fallen to roughly $800 million to $1.1 billion, a decline of more than 99% from the peak, as quantitative tightening and other market dynamics absorbed the excess liquidity.8Federal Reserve Bank of St. Louis. Overnight Reverse Repurchase Agreements: Treasury Securities
Why This Market Matters Beyond Wall Street
Repo transactions produce the Secured Overnight Financing Rate, or SOFR, one of the most widely used benchmarks in the financial system. SOFR is a volume-weighted median of transaction-level data from tri-party repos, certain interdealer repo transactions, and bilateral Treasury repos cleared through the Fixed Income Clearing Corporation.9Federal Reserve Bank of New York. Secured Overnight Financing Rate Data
SOFR replaced LIBOR as the primary benchmark for adjustable-rate mortgages, corporate loans, and derivatives. If your floating-rate loan is tied to SOFR, the rate you pay is derived from repo and reverse repo transactions in the Treasury market every day.
How Reverse Repos Show Up on the Books
Although the legal paperwork looks like a sale, reverse repos are almost always accounted for as secured borrowings rather than true sales. Under FASB standards, the borrower retains economic exposure to the transferred securities throughout the deal, so the transaction is treated as financing.10Financial Accounting Standards Board. Accounting Standards Update 2014-11 – Transfers and Servicing (Topic 860)
For the cash lender, the money paid out is booked as a short-term investment, and the price difference is recognized as interest income over the life of the agreement. For the borrower, the cash received is a liability, the price differential is interest expense, and the underlying securities stay on the balance sheet.11National Association of Insurance Commissioners. Statutory Issue Paper No. 45 – Repurchase Agreements, Reverse Repurchase Agreements and Dollar Repurchase Agreements The accounting matches the economic reality: it’s a loan, dressed as a sale.