TL;DR. A repurchase agreement (“repo”) is an overnight cash loan collateralized by a security — usually a US Treasury. The borrower sells the security today and buys it back tomorrow at a slightly higher price; the difference is the interest. A reverse repo is the exact same trade seen from the cash lender’s side. The Federal Reserve uses its own reverse repo facility (ON RRP) as a floor and its Standing Repo Facility (SRF) as a ceiling to keep short-term rates inside the federal funds target range. When that plumbing breaks, as it did on September 17, 2019, overnight rates can spike from around 2% to 10% in a matter of hours.
What is a repo?
A repurchase agreement is a two-legged trade. On day one, a cash borrower sells a security to a cash lender for an agreed price. On day two — usually the next morning — the borrower repurchases the same security at a slightly higher price. Economically, it is a secured overnight loan. Legally, it is a sale and a forward purchase, which matters for bankruptcy treatment.
Every repo has four inputs: the collateral (typically a Treasury), the cash amount, the repo rate, and the haircut. The haircut is the discount applied to the collateral’s market value — if a dealer posts a $100 Treasury at a 2% haircut, they receive $98 of cash. The extra $2 of collateral protects the lender if the borrower defaults and the collateral price moves against them before it can be sold.
Reverse repo is the same trade from the other side
The confusion most people hit on their first repo lesson is the naming. There is only one trade. If you are lending your Treasury and taking cash, you are doing a repo. If you are lending cash and taking a Treasury as collateral, you are doing a reverse repo. Same contract, different balance-sheet side.
That symmetry is why the Federal Reserve’s reverse repo facility is where money funds park cash. The Fed is the borrower and posts a Treasury from its System Open Market Account; the money fund is the lender. The fund gets a safe overnight rate; the Fed drains cash from the system.
Who actually uses the repo market
Repo is one of the largest funding markets in the world. The Office of Financial Research’s Short-Term Funding Monitor tracks daily volumes across four segments: tri-party (custody handled by BNY), sponsored (FICC clears trades between money funds and dealers), DVP (bilateral delivery-versus-payment), and GCF (inter-dealer). Together, gross US repo volumes routinely run in the multi-trillion-dollar range every day.
| Player | Typical role | Why they use it |
|---|---|---|
| Primary dealers | Cash borrower | Finance their inventory of Treasuries and agency MBS overnight instead of on their own balance sheet. |
| Money market funds | Cash lender | Earn an overnight yield backed by government collateral — the closest thing to a risk-free short-duration bid. |
| Hedge funds | Both sides | Finance long positions and source specific bonds to short (the “special” market). |
| Banks & broker-dealers | Cash borrower or lender | Manage liquidity and high-quality liquid asset (HQLA) requirements day to day. |
| Government-sponsored enterprises (GSEs) | Cash lender | Fannie, Freddie, and the Home Loan Banks lend excess cash overnight since they do not earn interest on Fed reserves. |
| Federal Reserve | Both, via facilities | Drains cash through ON RRP (lends collateral); adds cash through SRF (accepts collateral) to steer overnight rates. |
Where the Fed sits: RRP as floor, SRF as ceiling
The Federal Reserve does not set the repo rate directly. It builds a corridor and lets the market clear inside it. Money funds will not accept a rate below what the Fed pays at the ON RRP, so ON RRP acts as a floor. Dealers will not pay much above what the Fed charges at the SRF, so SRF acts as a ceiling. In between sits the market-clearing rate, which SOFR measures.
| Rate | Sep 2026 | What it is |
|---|---|---|
| Fed funds target range (upper) | 3.75% | The top of the FOMC’s target band. |
| Standing Repo Facility (SRF) | 3.75% | Fed lends cash against Treasuries, agency debt, and agency MBS at this rate. Caps how high repo can go. |
| Interest on reserve balances (IORB) | 3.65% | What the Fed pays banks for reserves. Anchors fed funds itself. |
| SOFR (market) | 3.66% | Volume-weighted median of overnight Treasury repo trades. The reference rate for most floating-rate USD debt. |
| Overnight Reverse Repo (ON RRP) | 3.50% | Fed borrows cash from money funds and GSEs against SOMA Treasuries. Sets the floor. |
| Fed funds target range (lower) | 3.50% | The bottom of the FOMC’s target band. |
Every ON RRP counterparty can post up to $160 billion per day at the Fed. The list includes primary dealers, 2a-7 money market funds, GSEs, and eligible banks. The SRF is smaller and aimed at dealers and depository institutions, with a $40 billion cap per counterparty per security type, but the Fed can raise size limits when it needs to.
The 2022 pandemic bulge and the 2026 unwind
The ON RRP facility was a sleepy backstop for years. Then quantitative easing during the pandemic created more reserves than the system could absorb, Treasury bills were scarce, and money funds had nowhere to put their cash. ON RRP take-up ballooned from near zero in early 2021 to a peak above $2.5 trillion at the end of 2022, according to the FRED RRPONTSYD series. It then drained as the Treasury flooded the market with T-bills, quantitative tightening pulled reserves down, and money funds moved cash back into bills yielding a hair more than the Fed. By September 1, 2026, take-up was $0.725 billion — essentially empty.
Why September 2019 mattered
Repo mostly runs quietly because the Fed provides enough reserves and enough collateral flexibility that dealers can always finance their books. When that breaks, it breaks loudly. On September 17, 2019, two ordinary events — quarterly corporate tax payments that pulled over $100 billion out of the banking system and the settlement of $54 billion in newly issued Treasuries — collided with a system whose reserves had already been drained by earlier quantitative tightening. Bank reserves had fallen to about $1.4 trillion, their lowest level since 2011. Overnight repo rates hit as high as 10% intraday, and SOFR jumped 2.3 percentage points to 5.25%. The New York Fed had to step in with $75 billion in overnight lending that day and again every day for weeks.
The Standing Repo Facility, launched in 2021, exists so that episode does not repeat. The SRF is always available, at a pre-announced rate, against high-quality collateral. A dealer that would otherwise pay 10% overnight can just borrow from the Fed at the SRF rate instead. Whether the facility is big enough to stop a stress event at the modern scale of markets is still open, but it is the main line of defense.
Common mistakes people make about repo
- Confusing the Fed’s reverse repo with a signal of tightening. High ON RRP take-up does not mean the Fed is draining money for policy reasons. It usually means money funds have too much cash and not enough short bills, so they park it at the Fed by default.
- Treating SOFR like a policy rate. SOFR is a market rate. The Fed can influence it through the corridor, but it is set by trades between private counterparties.
- Assuming all repos are Treasury-backed. Bilateral repo also uses agency debt, agency MBS, corporates, and equities. The Fed’s facilities are narrower on purpose — they take only the highest-quality collateral.
- Ignoring the special / general collateral split. Some bonds trade “special” — borrowers pay a lower repo rate because everyone wants that specific issue to cover a short. GC (general collateral) repo is what SOFR measures; specials are excluded.
Related concepts to learn next
- SOFR term structure and how it replaced LIBOR as the reference rate for floating-rate debt.
- The distinction between tri-party, bilateral, and cleared repo, and why FICC sponsored repo has grown.
- Basel III “leverage ratio” and “HQLA” rules — the biggest reason banks are less willing to intermediate repo at quarter- and year-end.
- The Fed’s balance sheet mechanics: how QE and QT actually change reserves.
Sources
- Federal Reserve Bank of New York, FAQ on Overnight Reverse Repurchase Agreement Operations.
- Federal Reserve Bank of New York, FAQ on Repurchase Agreement Operations (Standing Repo Facility).
- Federal Reserve Bank of New York, Secured Overnight Financing Rate reference-rates page.
- FRED, St. Louis Fed: SOFR, RRPONTSYD, IORB, DFEDTARU, DFEDTARL.
- Office of Financial Research, Short-Term Funding Monitor.
- Wikipedia, September 2019 events in the U.S. repo market.
- Wikipedia, Repurchase agreement.
Disclosure: This article is for informational purposes only and is not investment advice.