March 12, 2020

The New York Fed Announced A New Repo Program. What Does That Mean?

The repurchase agreement, or “repo,” market is an obscure but important part of the financial system that has drawn increasing attention lately. On average, $2 trillion to $4 trillion in repurchase agreements – collateralized short-term loans – are traded each day. But how does the market for repurchase agreements actually work, and what’s going on with it?

A repurchase agreement (repo) is a short-term secured loan: one party sells securities to another and agrees to repurchase those securities later at a higher price. The securities serve as collateral. The difference between the securities’ initial price and their repurchase price is the interest paid on the loan, known as the repo rate.

The New York Fed increased the size of its repurchasing operations today in order to address the “highly unusual” disruptions in Treasurys markets. It said it would offer $500 billion in a three-month repo operation both today and tomorrow. It also said it would offer $500 billion in a one-month repo operation tomorrow. The New York Fed added it would conduct one-month and three-month operations for $500 billion every week for the remainder of the month. This is on top of at least $175 billion in daily overnight repo operations. As part of the repo operations, the Fed will temporarily lend out funds to broker-dealers in return for collateral such as Treasurys and mortgage-backed securities. The Fed’s interventions comes as market participants have worried about the difficult of trading Treasurys in the last few days.

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about the author:

Mike Shorr

Since 1994, Michael has been an on-the-floor market maker, Vice-President of Interest Rate Derivatives for Knight Financial Products and Director of Education and Options Instructor at Trading Advantage. He makes the oftentimes complex world of options and trading accessible to the novice and advanced trader alike. Michael has a Bachelor of Science degree in Statistics and Finance from the University of Illinois Champaign-Urbana. He presently is Director, Trader Education at ProsperTradingAcademy.

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