sale of securities coupled with an agreement to repurchase the securities at a higher price on a later date. A repurchase agreement is similar to a secured loan. Most repurchase agreements (or repos, as they are called) are overnight transactions, with the sale taking place one day and repurchase the next. Long-term repos, or term repos, can extend for a month or more, usually for a fixed time period. The opposite side of a repurchase agreement is a reverse repurchase agreement, a purchase of securities followed by a sale back to the seller. Securities dealers use repurchase agreements to finance their inventories, selling their inventories to counterparty investors (for instance, a money market mutual fund) that have excess short-term funds they want to invest in higher-yielding securities.
An innovation in repo trading by the Fixed-Income Clearing Corporation, first introduced in 1998, allows dealer firms to freely trade general collateral repos-the most widely traded type of repurchase agreement-throughout the day without intraday trade-for-trade settlement, adding greater efficiency to the repo market. Securities eligible for trading include Fannie Mae and Freddie Mac fixed-rate mortgage backed securities and U.S. Treasury bills, notes, and bonds.