Lesson 5 of 6 · 14 min
Repos in practice: uses, repo rates, risks and triparty structures
Repos are cheap, flexible secured funding used to finance positions, park cash and borrow securities for shorting, but their very short, uncommitted nature means lenders can walk away exactly when a borrower needs them most.
In short
- Three uses: finance owning a security, earn short-term secured income on cash, and borrow a security to sell it short. Central banks also use repos for temporary monetary policy.
- From the cash lender's side the trade is a reverse repo. A repo on one specific security is a special, done at the special collateral rate, which can fall below the GC rate or even below zero.
- Repo rates rise with money market rates, riskier collateral, longer terms and weaker or no collateral delivery; they fall when the collateral is in high demand.
- Risks: default, collateral, margining, legal, and netting and settlement risk.
- Bilateral repos are done directly; in a triparty repo a custodian or clearinghouse handles collateral, valuation and custody but does not take on the credit risk.
- Overnight, uncommitted repo funding brings rollover and liquidity risk; firms must balance its low cost against the flexibility of long-term debt and equity.
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