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Reverse Repo (Reverse Repurchase Agreement)

Trading Term

A reverse repo is a short‑term financial transaction where one party lends cash to another party in exchange for securities as collateral, with the agreement that the securities will be bought back later at a slightly higher price.

From the lender’s perspective (often a bank, money‑market fund, or the Federal Reserve), it works like this:

  • They give cash today
  • They receive securities as collateral
  • The borrower repurchases those securities later at a predetermined price
  • The price difference functions like interest on the short‑term loan

In other words, a reverse repo is essentially a secured loan, but structured as a buy‑sellback transaction.

Why It Matters:

  • It helps financial institutions manage short‑term liquidity.
  • It allows the Federal Reserve to absorb excess cash from the banking system, which helps control short‑term interest rates.
  • It’s considered very low‑risk because the loan is fully collateralized by high‑quality securities (often U.S. Treasuries).

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