News Archives: October, 2026
The Federal Reserve Bank of New York's "Liberty Street Economics" recently asked, "Who's Borrowing and Lending in Repo Markets?" The article states, "Repo markets play a vital role in the U.S. financial system. In this three-part series, we examine who participates in these markets, what trade-offs influence how different repo segments are structured, and why repos matter for monetary policy. Today's post introduces repo transactions, focusing on the major private-sector participants and why they engage in these markets." (Note: Thanks again to those of you who attended and supported our European Money Fund Symposium in Paris! Mark your calendars for next year's show in London, Sept. 23-24, 2027!)
It explains, "A repurchase agreement or repo is a financial transaction in which one party sells a security in exchange for cash, with the commitment to repurchase the same (or a closely related) security for a prespecified price on a future date. (From the perspective of the party buying the security and later reselling it, this transaction is called a reverse repo.) Repos are an essential component of the U.S. financial system, acting both as a source of funding and short-term investment for many financial institutions, as well as a marketplace for obtaining specific securities. Recent estimates assess the daily amount of outstanding agreements in the U.S. at around $13.5 trillion or 40 percent of U.S. GDP."
The blog comments, "The time between the initial sale and the repurchase, along with the price difference, determines the interest rate, known as the repo rate. Repo rates vary depending on a variety of factors, most notably the type of collateral accepted (the securities sold), maturity (the length of time between the initial sale and repurchase), counterparty, the size of the haircut (the difference between the value of the securities sold and cash delivered), and clearing (the process between the execution and final settlement of a transaction). Around 70 percent of repos are collateralized by U.S. Treasury securities and most have an overnight maturity. In terms of clearing, around 60 percent of repos are cleared through a central counterparty (35 percent) or through a third party (25 percent), while 40 percent are directly cleared between the buyer and seller (OFR 2025)."
It says, "Many different types of transactions take place in repo markets. For example, a dealer -- acting as an intermediary -- can purchase securities from levered investors like hedge funds (a reverse repo from the dealer's perspective), and also enter into a repo with other dealers or with cash lenders such as money market funds (MMFs) to sell the securities, thus ultimately channeling funds from cash lenders to cash borrowers. In tomorrow's post, we delve deeper into the microstructure of various segments of repo markets."
The piece states, "Repos can be traced back to the early 20th century. Repo market size and contracting conventions changed markedly in the 1980s following the failure of several dealers, amid a rising level and volatility of interest rates and growing supply of Treasury debt.... An important convention that has contributed to the liquidity and growth of repo markets is that repos involving Treasury and federal agency securities are exempt from the automatic stay under the U.S. Bankruptcy Code that, as the name suggests, comes into effect when a company files for bankruptcy and stays creditors from taking certain actions on account of their claims against the company. This means that if the cash borrower defaults during the life of the repo, the cash lender can generally terminate its repo contracts with the defaulting counterparty, sell the securities promptly, and avoid the delay and uncertainty of the bankruptcy process."
It continues, "In a repo, the party selling the security is interested in borrowing cash. The counterparty, however, may enter the repo transaction for one of two reasons: to invest cash and earn a return, or to obtain a specific security. The first motive makes a repo economically similar to other short-term money market instruments such as federal funds, Eurodollars, or commercial paper. Unlike in these markets, the transaction is collateralized: from the perspective of the cash lender, the securities reduce the risk of the trade."
The update adds, "Repos also play a key role in monetary policy implementation. In today's post we focus on private repos, returning to their use in central banks' toolkits in the third post of this series. Relative to the federal funds and Eurodollar and selected deposits markets, the landscape of private repo participants is more complex for two main reasons. First, there is a broader and more diverse set of ultimate borrowers and lenders. Second, dealers are instrumental intermediaries in repo markets. In the remainder of this post, we shed light on the first category, describing the key role of dealers in tomorrow's post."
It tells us, "The top cash borrowers in private repo markets are hedge funds. Hedge funds rely on repo markets for leverage to boost their returns. An example of a hedge fund strategy that uses repo is the so-called 'Treasury cash-futures basis trade.' In this strategy, a hedge fund purchases a Treasury security and sells a Treasury futures contract, which enables it to profit from the price differential. To amplify the return on the basis trade, hedge funds finance the purchase of the Treasury securities with cash borrowed in a repo that uses those securities as collateral.... Hedge fund borrowing in repo markets tripled over 2013-23, from $400 billion to $1.5 trillion; and then it doubled again in the following two years, reaching $3 trillion in late 2025. The next three largest borrowers in repo markets today are U.S. branches and agencies of foreign banks (FBOs), U.S. depository institutions (USDIs), and real estate investment trusts (REITs). Jointly, their outstanding borrowing in repo has ranged between $800 billion and $1.3 trillion since 2013."
Lastly, they write, "The main cash lenders in repo are MMFs. [B]etween January 2013 and January 2021, MMF lending increased by 90 percent, from under $600 billion to $1 trillion. In the following five years, MMF lending almost tripled, reaching $3 trillion in January 2026. Repo markets offer MMFs a short-term investment that meets their regulatory requirements on maturity and asset composition while providing flexibility to help manage investor redemptions. The second largest lenders in repo are hedge funds.
The second update in the NY Fed's series, "Follow the Cash! Microstructure of Repo Markets," tells us, "The repo market in the U.S. is a mosaic of segments with distinct participants and various settlement and clearing practices. Why do large cash lenders typically settle their trades through a third-party agent? Why does the interdealer market clear through a central counterparty? Why do levered investors favor bilateral trades? In the second post of this series, we follow the cash as it navigates through repo markets to better understand the costs and benefits that shape the existing market structures."
It concludes, "The various microstructures of repo segments observed in the U.S. reflect how a heterogeneous set of participants evaluate the trade-offs involved in repo transactions differently. Costs related to the settlement of securities led to the emergence of tri-party repo; balance sheet costs favor central clearing; meanwhile, creative contracting—such as netted packages—mitigates costs in bilateral, non-centrally cleared repos."
Finally, the third blog post, "The Role of Repos in Monetary Policy Implementation," says, "In the first two posts of this three-part series, we discussed private market participants that are active in repo markets for profit-making motives. Central banks are also active repo market participants, but their reasons often differ from those of private participants. In today's post, we discuss how central banks use repos to manage liquidity in the financial system and implement monetary policy."
