What is a repurchase agreement (Repo)?

A repurchase agreement, often called a repo, is a key part of daily activity in wholesale money markets. Banks use repos to fund their balance sheets, while central banks use them to control liquidity and guide short-term interest rates. 

Some corporate treasurers are turning to repos, investing surplus cash securely with collateral instead of making unsecured deposits. However, despite the market's size, many people outside specialist trading desks and treasury teams still find them confusing.

This guide covers what a repurchase agreement is, how it works in practice, and why it’s important for institutional cash investment.

What is a repo?

A repurchase agreement comprises two steps and centres on a single security, often a government bond or something similar. One party sells the security to another for a set amount of cash, and ownership passes to the buyer for the length of the deal. At the same time, the seller promises to buy back the same security on a specific future date for a slightly higher price.

The price difference is not a trading profit for either party, even if it might seem that way at first. Instead, it’s the interest charged on the cash for the duration of the deal, called the repo rate. Legally, this setup is two separate sales of the same security, agreed at once, which may appear to be a change of ownership. In practice, it works like a short-term loan secured by the security.

This setup is why it’s called a repurchase agreement, as the seller buys back the asset. From the buyer’s perspective, it’s called a reverse repo because they buy first and sell back later. Our guide on repo vs reverse repo explains this difference in more detail, including how each side handles risk.

How does a repo work in practice?

Let’s look at a simple example: A bank has £20 million in UK gilts and needs short-term cash to cover an overnight funding gap. The bank sells the gilts to a money market investor for £20 million and agrees to buy them back in seven days for a higher amount. The higher price reflects an annualised repo rate of 4.5% for the seven days the cash is lent.

During that week, the interest earned is about £17,260 on the £20 million invested. The bank buys back the gilts for £20,017,260, so the investor gets a secured return for lending the cash. The investor owns the gilts during the deal, which means they have a direct claim on the collateral if the bank doesn’t repurchase them.

This basic exchange is at the heart of every repo, no matter the deal size. Cash goes one way, high-quality collateral goes the other. The agreed repurchase price covers the borrowing cost for the set period.

The different types of repo

Repos mainly differ by how long they last and how the collateral is held. An overnight repo ends the next business day, while a term repo lasts for a set period, from a few days to several months. An open repo has no fixed end date and continues until either party ends it.

Collateral can be held in two ways. In a bilateral setup, the two parties handle settlement and valuation themselves. More often now, collateral is held in a tri-party arrangement, where an independent custodian like Euroclear or Clearstream manages and values the collateral for both sides. Tri-party structures make operations much easier and are now standard for most institutional repo deals.

Who uses the repo market?

Commercial banks are the biggest users of repos, relying on them every day to fund trading books and meet short-term cash needs. Central banks are also major users, making repo a key part of monetary policy. For example, the Bank of England uses repo operations with gilts as part of its Sterling Monetary Framework to control liquidity in the banking system.

Money market funds, asset managers, and corporate treasurers also use repos directly. Some use repos to borrow cash against securities they already own, while most invest cash securely with collateral.

Why the repo market matters for corporate treasury

For treasurers managing extra cash, repo offers a direct claim on collateral if the other party defaults. Instead of depending only on a bank’s credit, the investor holds an asset they can sell to get their money back.

This difference matters when treasury teams must justify every cash decision based on risk. In the past, using the repo market meant having the legal paperwork, credit lines, and systems of a bank or large asset manager. That made it hard for most companies and funds to access, even if they wanted a more secure option.

TreasurySpring gives institutions access to the tri-party repo market through a single onboarding process. You don't need to negotiate a Global Master Repurchase Agreement or set up separate relationships with each counterparty. You can find more details on our platform page.

The takeaway

At its heart, a repurchase agreement is a secured loan set up as two trades in one security. This structure makes the repo market one of the most stable parts of the financial system. Both banks and central banks use it every day. That’s also why more corporate treasurers now see repo as a natural way to manage cash.

Learning how repo works is the first step to keeping your cash secure and consistent with your needs.  Contact TreasurySpring to learn more about secured Fixed-Term Funds.

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*TreasurySpring’s blogs and commentaries are provided for general information purposes only, and do not constitute legal, investment or other advice.