I know this might not be a very quantitative question, but I figure this is the most relevant place to ask this.

Over that last few days, there has been a lot of news from the repo market, for example, https://www.bloomberg.com/news/articles/2019-09-17/with-repo-market-still-on-edge-fed-preps-second-blast-of-cash

Approximately half of the repo market is attributed to overnight repurchase agreements. What is the point of entering a repo agreement for such a short term? I have been able to find a lot of material with examples of two parties entering the agreement and explanations of how they work, but what is the motivation?

If I put up 100 million worth of treasury bills and in return, get cash and enter an agreement that I have to repurchase those bills the next day, what is the point of that cash? What can I do with that money in such a short time? Is it simply for some regulatory/filing purposes to show that you have cash on hand?

  • $\begingroup$ This link maybe help you understand what's going on a bit more business.financialpost.com/pmn/business-pmn/… $\endgroup$ – amdopt Sep 18 '19 at 17:54
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    $\begingroup$ It is not just "for regulatory purposes". It is real cash that can be used to pay bills that are coming due today, and that you must absolutely pay if you are a financial institution. $\endgroup$ – Alex C Sep 18 '19 at 18:24
  • $\begingroup$ but in a repurchase agreement, you need to have the cash back the next day to repurchase the T bills (or whatever collateral). So if you use that cash to pay the bills, what cash do you use to do the repurchase? $\endgroup$ – Mustard Tiger Sep 18 '19 at 19:18
  • $\begingroup$ @MustardTiger You can rollover the debt with another repo: pay the existing, get a new one $\endgroup$ – alexbougias Sep 18 '19 at 19:22
  • $\begingroup$ But then why are most of them so short term? the borrower should have an idea of what duration he needs to pay back the cash, why are they not set based on that? $\endgroup$ – Mustard Tiger Sep 18 '19 at 19:24

You have positions that you need to finance via overnight repo. You secure financing by simultaneously entering into repo transaction with a bank to secure the cash to purchase the Treasury security, then providing this security to the bank as collateral.

in other words, this is a form of collateral lending similar to getting a mortgage on a house. You don't have millions of dollars sitting around so you obtain a loan to buy the property. If you fail to make repayment on your loan, the bank seizes your house.


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