TL;DR. A repurchase agreement — “repo” — is an overnight loan secured by Treasury or agency collateral. The cash borrower sells securities today and agrees to buy them back tomorrow at a slightly higher price; that small price difference is the interest. Repo is how dealers, banks, money funds, and the Federal Reserve move trillions of dollars of short-term cash every day. SOFR, the rate that replaced LIBOR, is built directly from repo trades. And the Fed’s reverse repo facility (ON RRP) has drained from a $2.55 trillion peak in late 2022 to under $1 billion this week — a quiet but enormous shift in the plumbing of U.S. money markets.
What is a repo, in one sentence?
A repurchase agreement is a sale of securities today combined with a contract to buy them back at an agreed price on a future date. Economically, it is a collateralised loan: cash on one side, securities on the other. Legally, it is a sale-and-repurchase, which matters in bankruptcy.
Take a simple trade. A hedge fund holds a $100 million 10-year Treasury note and needs cash overnight. It sells the note to a money market fund for $99.5 million and agrees to buy it back tomorrow for $99.51 million. The $0.01 million difference is interest. The “haircut” — the $0.5 million between the bond’s market value and the cash advanced — protects the lender if collateral prices fall before the trade unwinds. The borrower’s side of this trade is a repo; the lender’s side, looking at the same trade in mirror, is a reverse repo. Every repo is somebody else’s reverse repo (NY Fed primer).
Why repo exists: the plumbing it solves
Banks, dealers, and asset managers face an inventory problem every day. Broker-dealers warehouse hundreds of billions of dollars of Treasuries between client orders. Money funds and corporate treasurers sit on cash that has to earn something overnight, but cannot sit in an uninsured demand deposit. Hedge funds want leverage on bond trades. Repo glues all of these needs together.
- The cash lender (money fund, bank, GSE, central bank) gets a short, safe, secured place to park cash and earn an overnight rate.
- The cash borrower (dealer, hedge fund, bank) gets funding cheaper than unsecured borrowing because the loan is collateralised.
- The collateral stays liquid — Treasuries pledged in repo can be re-used and continue to circulate.
The market is huge. The Federal Reserve Bank of New York calculates SOFR on a daily basis from roughly $2 trillion of overnight Treasury repo transactions — tri-party, GCF, and bilateral cleared (NY Fed SOFR methodology). A single day’s flow is larger than the annual GDP of most countries.
The three flavors of repo you’ll hear about
Most repo trades fall into one of three buckets, distinguished by who holds the collateral and how trades clear.
| Segment | Who clears it | Typical counterparties | What it’s used for |
|---|---|---|---|
| Tri-party | BNY Mellon (custodian) | Money funds ↔ dealers | Dealer financing of Treasury inventory |
| GCF Repo | FICC (DTCC subsidiary) | Dealer ↔ dealer (inter-dealer) | Funding mismatches between dealers |
| Bilateral | Direct (or FICC’s sponsored DVP) | Dealer ↔ hedge fund / asset manager | Specific-collateral trades, hedge-fund leverage |
| Fed ON RRP | NY Fed Open Market Desk | Money funds ↔ Federal Reserve | Floor on overnight money-market rates |
The four together explain a lot of overnight cash flow in the United States. SOFR is built from the first three, weighted by volume. The fourth — ON RRP — is what the Federal Reserve runs to keep overnight rates inside its target range.
What is a “reverse repo” and how does the Fed use it?
In plain language: when the Federal Reserve does an overnight reverse repo (ON RRP), it sells securities to an eligible counterparty (almost always a money market fund) and agrees to buy them back the next day. The counterparty hands over cash and earns the ON RRP offering rate. From the Fed’s side it’s reverse repo. From the money fund’s side it’s a repo — they lend cash, earn interest, hold Treasuries as collateral.
The economic effect is to put a floor under overnight money-market rates. If a money fund can deposit cash at the Fed and earn the ON RRP rate, it has no reason to lend below that rate in private markets. The ON RRP rate is set by the FOMC at each meeting and currently sits at 3.50% — the lower bound of the Fed’s 3.50%–3.75% target range — while interest on reserve balances (IORB) sits at 3.65% (FOMC; H.15).
Concept diagram: cash, collateral, and rate
The rates: SOFR, EFFR, IORB, and the ON RRP floor
Once you know what repo is, the rate alphabet stops being intimidating. Each rate is just the price at one point in the overnight market, set by a particular mechanism. Here is where they sat at the most recent Fed publication:
| Rate | Level | What it measures |
|---|---|---|
| Fed target range | 3.50%–3.75% | FOMC’s chosen band for overnight rates |
| IORB | 3.65% | Rate Fed pays banks on reserve balances |
| Discount window (primary credit) | 3.75% | Rate Fed charges banks borrowing directly |
| Federal funds (effective) | 3.62% | Volume-weighted unsecured interbank rate |
| SOFR | 3.51% | Volume-weighted overnight Treasury repo rate |
| ON RRP offering rate | 3.50% | Rate Fed pays money funds in reverse repo |
The Fed has built a “corridor” system. ON RRP is the floor — any money fund can lend cash to the Fed at the offering rate, so private repo trades at or above it. IORB is the ceiling for bank reserves — banks have no reason to lend cash below what they earn risk-free at the Fed. The discount window is the hard ceiling for solvent banks borrowing against good collateral. SOFR and EFFR settle inside that corridor most days.
The big story right now: the ON RRP has drained to nearly zero
For two years after late 2021, money market funds parked an enormous pile of cash at the Federal Reserve through ON RRP. Treasury bill supply was scarce, and the Fed’s facility offered a safe, sticky, slightly-better return than alternatives. ON RRP take-up peaked at $2,553.7 billion on December 30, 2022. As of May 22, 2026, take-up was $0.965 billion (FRED: RRPONTSYD).
Three forces drove that drain. First, the Treasury issued a flood of T-bills after the June 2023 debt-ceiling deal, giving money funds a better-yielding alternative to ON RRP. Second, the Fed cut its policy rate from a peak target range of 5.25%–5.50% in 2024 through to 3.50%–3.75% today, making the ON RRP rate less of a destination. Third, quantitative tightening drained reserves and squeezed the system’s overall liquidity buffer.
The implication: the money-market system has lost a $2.5 trillion shock absorber. When repo rates briefly spike around quarter-ends or settlement humps, there is much less idle cash sitting at the Fed waiting to be redeployed into private markets. The September 2019 repo blow-up — when SOFR jumped from 2.20% on Sept 13 to 5.25% on Sept 17, 2019, well above the 2.00%–2.25% Fed funds target range — is the cautionary tale (FRED: SOFR; analysis in BIS Quarterly Review, Dec 2019).
SOFR: why repo became the world’s reference rate
SOFR — the Secured Overnight Financing Rate — replaced U.S. dollar LIBOR after a global rate-rigging scandal exposed how thin and manipulable the old benchmark was. LIBOR was a poll of large banks’ guesses about their unsecured borrowing costs. SOFR is a transaction-based rate: the volume-weighted median rate on roughly $2 trillion of daily overnight Treasury repo (NY Fed SOFR). It is much harder to manipulate and much closer to a true cost of secured funding.
Today SOFR underpins floating-rate corporate loans, securitisations, derivatives, and a growing slice of mortgages. When the headline says “Term Loan B at SOFR + 350,” that 350 basis-point spread is the credit risk premium above whatever overnight repo costs that day. The repo market is no longer a backwater — it is the rate benchmark for the U.S. credit system.
Common mistakes & when repo breaks
- “Repo is just unsecured lending.” It isn’t. Repo is a sale-and-repurchase, and bankruptcy courts treat it that way. In a default, the lender can keep and sell the collateral immediately — no automatic stay (Philly Fed primer).
- “Haircuts only matter for risky collateral.” Even Treasuries get a small haircut (often 1–2%), because lenders care about the price between today and tomorrow morning. For corporate bonds, haircuts of 5%–15% are common.
- “SOFR is the same as Fed funds.” SOFR is secured (Treasury collateral); EFFR is unsecured (bank-to-bank). They usually trade within a handful of basis points but can diverge sharply at quarter-end.
- “The Fed always controls SOFR.” Mostly. But when reserves get scarce — September 2019, March 2020 — SOFR can spike above the corridor before the Fed intervenes through the Standing Repo Facility, the Fed’s permanent counter-tool to a repo squeeze (NY Fed SRF FAQ).
Related concepts and what to learn next
Repo connects to almost every other money-market topic. Worth reading next: the yield curve (the Treasury collateral in repo is what defines the curve’s front end), how ETFs work (cash management uses repo heavily), and QE vs QT (the source of the reserves that ultimately fund the ON RRP). If you want one rabbit hole, read about how the Treasury’s General Account at the Fed pulls reserves out of the banking system every time the TGA balance rises — it’s the single most under-appreciated driver of weekly repo conditions.
Sources
- Federal Reserve Bank of New York — Fedpoint: Repurchase and Reverse Repurchase Transactions
- Federal Reserve Bank of New York — Secured Overnight Financing Rate methodology
- Federal Reserve Bank of New York — Reverse Repo Operations
- Federal Reserve Bank of New York — Standing Repo Facility FAQ
- Federal Reserve Board — Open Market Operations & FOMC target range history
- Federal Reserve Board — H.15 Selected Interest Rates (May 22, 2026)
- Bank for International Settlements — BIS Quarterly Review, December 2019: September stress in dollar repo markets
- St. Louis Fed FRED — Overnight Reverse Repurchase Agreements (RRPONTSYD); SOFR; IORB
- Federal Reserve Bank of Philadelphia — Repo Markets: An Introduction
- Liberty Street Economics, NY Fed — Sources of Borrowing in the Repo Market (Dec 2019)
Disclosure: This article was produced with AI assistance and reviewed before publication. It is for informational purposes only and is not investment advice.