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Definition of 'Repo'

Repo is short for repurchase agreement, a transaction used to finance ownership of bonds and other debt securities. In a standard repo transaction, a dealer finances its ownership of a bond by borrowing money from a customer on an overnight basis and posting the bond as collateral. The dealer borrows less than the market value of the bond, so that the loan from the customer is overcollateralized, protecting the customer against a drop in the value of the bond.

The transaction is structured as a sale of the bond, with an agreement to repurchase it the next day at a higher price that factors in the dealer's interest expense.

A dealer may also finance a customer's ownership of a bond by lending money and accepting the bond as collateral. This is a reverse repo and is structured as a purchase of the bond with an agreement to resell it to the customer the next day at a lower price that factors in the customer's interest expense.

When demand is running high for a specific Treasury issue, typically an on-the-run security, that security will trade "special" in the repo market, meaning that people who own the issue can borrow money at very low interest rates by posting it as collateral.

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