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Repurchase and reverse repurchase agreements
(Source: Stephen A. Lumpkin)

Introduction
Characteristics of RP agreements 
    Maturities 
    Principal Amounts (Member section)
    Yields (Member section)
    Determinants of RP Rates (Member section)
Calculation of RP Returns (Member section)
Valuation of Collateral (Member section)
Treatment of Accrued Interest (Member section)
Legal status of RP agreements (Member section)
Repo Custodial Arrangements (Member section)
Participants in the RP market  (Member section)
    Investors (Member section)
    Dealers (Member section)
    Financing (Member section)
    Federal Reserve (Member section)
Selected repo arrangements  (Member section)
Growth and development of the RP market (Member section)

Introduction
 
Repurchase agreement (repo or RP) and reverse repurchase agreement refers to a type of transaction in which a money market participant acquires funds which are immediately available by selling securities and simultaneously agreeing to repurchase the same or similar securities after a specified time at a given price, interest at an agreed-upon rate incurred.   When viewed from the perspective of the supplier of the securities (the party acquiring funds) such a transaction is called a repo and a reverse repo or matched sale-purchase agreement when viewed from the point of the supplier of funds.

The term to be used whether a repro or reverse agreement, usually depends on which party initiated the transaction, with a few exceptions: RP transactions between a dealer and a retail customer or between a dealer and the Federal Reserve, for example, are generally described from the dealer's perspective. A retail investor's purchase  and commitment to resell securities to a dealer is a repo as the dealer has sold the securities under an agreement to repurchase. Similarly, the transaction when the Federal Reserve supplies funds to the market by buying securities from dealers with a commitment to resell, is called a repo.  The converse transaction, in which specific securities are sold from the System's portfolio for immediate delivery and simultaneously repurchased for settlement on the desired date, is called a matched sale-purchase agreement (MSP). (When the Fed is involved, the term "reverse repo" generally is not used, although MSPs produce the reverse effect on reserves as RPs.)

Repos (in many respects),  are hybrid transactions that combine features of both secured loans and outright purchase and sale transactions but do not fit clearly into any one classification.  

Examples of repo features that are characteristic of secure lending arrangements, are:
- The use of margin of haircuts in valuing repro securities
- The right to substitute collateral in term agreements 
- The use of mark-to-market provisions

The above will rarely  be found in outright purchase and sale transactions.

By contrast, the repo buyer's right to trade the securities during the term of the agreement,  represents a transfer of ownership that normally does not occur in collateralized lending arrangements.

Characteristics of RP agreements 
 
Maturities     (more info)
RP agreements usually are arranged with short terms to maturity--overnight or a few days. Longer-term repos are arranged for standard maturities of one to three weeks and one to  three, and even six months. Other fixed-term, multi-day contracts are negotiated occasionally and repos also may be arranged on an "open" or continuing basis. Continuing contracts resemble a series of overnight repos; they are renewed each day with the repo rate or the amount of funds invested adjusted to reflect prevailing market conditions. If, for example, the market value of the securities being held as collateral were to fall below an agreed-upon level, the borrower would be asked to return funds or provide additional securities. Continuing contracts usually may be terminated on demand by either party.

Principal Amounts    
RP transactions are usually arranged in large dollar amounts. Overnight contracts and term repos with maturities of a week ..............................

More information is provided in the Member Area

Recommended further reading:
Alternative investments: Managed futures and hedge funds 
Introduction to Institutional Trading 
An Introduction to Bank Debenture Trading Programs 
Books on Financial Instruments