Repurchase Agreement - Repo

The basic structure goes like this: you sell a security to someone, but as you make the sale, you promise to buy it back at some point in the future. It may seem a little pointless, but it functions like a loan. You are borrowing money from the person you sold the security to, with the security acting as collateral. You then pay it back, getting your security returned to you as the deal closes.

In practice, repos typically happen in very short time intervals, including overnight transactions. Also, the securities involved are often short-term government securities, like T-bills.

The government uses this method to provide liquidity to markets, with the Federal Reserve acting as a major repo purchaser.