Summary of The Repo Market, Explained

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For market stakeholders, September 2019 brought back some bad memories of the 2008 credit crisis, as financial liquidity froze and short-term borrowing costs skyrocketed. For the public, the repurchase agreement (repo) is not a household name, but it is critical to the health and vibrancy of the US financial system. This easy-to-follow video from The Wall Street Journal explains how the repo market ticks, why it triggered panic and what deeper regulatory issues might threaten its efficient functioning. New investors and finance students will find this a basic but valuable primer.

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WSJ Video is a part of the Wall Street Journal Digital Network.

 

Summary

Repurchase agreements (repos) are critical capital markets mechanisms that keep the financial system moving. 

At its most basic level, a repo is a loan between two parties: On one side, holders of cash, such as money market firms and asset managers, look to lend on a short-term basis, typically overnight. Their goal is to earn a return with little risk, and they interact with banking institutions, hedge funds and traders that require cash.

“The repo market provides a lot of the grease that keeps the wheels spinning, meaning it provides the cash that financial firms need to run their daily operations.”

In a simple example, money market fund A holds $100 in cash and wants to earn a repo return of 2%. ...


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