Sale and repurchase agreement - Financial definition
Financial acronyms
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Concise definition of the term sale and repurchase agreement
A sale and repurchase agreement, commonly called "repo", is a money market instrument in which one party sells securities to the other in exchange for cash. At the term of the repo transaction, the securities are repurchased and the cash returned with interest.
Comprehensive definition of the term sale and repurchase agreement
Repo transactions can be either securities-driven or cash-driven.
When cash-driven the transaction is motivated by the need to borrow cash, and the securities are pledged as collateral, thus enabling the cash borrower to obtain better conditions for his loan.
When securities-driven, the initiating party is the one which looks to borrow specific securities and lends cash in exchange, usually at a rate well below market levels. This, in turn, allows the borrower of the securities to invest the cash at market rates and thus realize a profit.
Although legal title to the collateral is transferred, the seller of the securities retains both the economic benefits, like coupon or dividend payments, and the market risk of owning them.