A reverse repo is a short-term transaction in which one party lends cash by buying securities from a counterparty, and that counterparty agrees to buy the securities back on a set date at a slightly higher price. The price difference is the cash lender’s interest. Most reverse repos are overnight, and the collateral is usually U.S. Treasuries, which is why the market is considered one of the safest places to park large sums of money for very short periods.
The same trade has two names depending on where you sit. The side putting up the cash calls it a reverse repo. The side handing over securities and getting cash calls it a repo. Every reverse repo is a repo to the other party.
How a Reverse Repo Works
Think of it as a secured overnight loan viewed from the lender’s side. The cash lender buys securities today and the seller promises to repurchase them tomorrow at a higher price. The gap between the two prices is the repo rate, and it is the lender’s compensation.
Repo interest uses an actual/360 day count. The annual rate is divided by 360, then multiplied by the number of days the cash is out. On an overnight trade the math is trivial. On a term repo of a week or longer, actual/360 produces slightly more interest than a 365-day convention would.
Legally, the deal is structured as an outright sale followed by a repurchase, not as a collateralized loan. That distinction looks like a technicality until a counterparty files for bankruptcy, at which point it becomes the single most important feature of the transaction. For tax purposes, the income piece is generally treated as interest rather than a capital gain.
Collateral and Haircuts
Reverse repos are only as safe as what backs them. U.S. Treasury bills, notes, and bonds are the dominant collateral because they are backed by the full faith and credit of the federal government and trade in deep, liquid markets. Agency debt and agency mortgage-backed securities are also eligible, usually on slightly less favorable terms.1Federal Reserve Bank of New York. Repo and Reverse Repo Agreements
To protect against price moves during the life of the trade, the cash lender applies a haircut to the collateral’s market value. A Treasury bond worth $1,000,000 might support only $980,000 in cash, giving the lender a 2% cushion. If the collateral falls sharply in value mid-trade, the seller may have to post more securities to restore the agreed coverage. Longer-dated bonds carry larger haircuts than short-term bills because their prices move more.
What Protects the Cash Lender if the Other Side Fails
Nearly all domestic repo activity runs under the Master Repurchase Agreement published by SIFMA.2Securities Industry and Financial Markets Association (SIFMA). MRA and GMRA Documentation Cross-border trades generally use the Global Master Repurchase Agreement maintained by ICMA.3International Capital Market Association (ICMA). What Is the GMRA Both treat each trade as a sale and repurchase, set out how collateral is valued, define margin call procedures, and establish close-out rights in a default. Standardized paper is why counterparties can execute hundreds of trades a day without renegotiating terms.
The sale-and-repurchase structure also unlocks a critical bankruptcy protection. Under 11 U.S.C. § 559, a repo participant’s right to liquidate, terminate, or accelerate a repurchase agreement cannot be frozen by the automatic stay that normally halts creditor action in bankruptcy.4Office of the Law Revision Counsel. 11 USC 559 – Contractual Right to Liquidate, Terminate, or Accelerate a Repurchase Agreement If a counterparty files on Tuesday morning, you can sell the collateral the same day rather than waiting out a bankruptcy proceeding. This safe harbor is the main reason institutions are willing to extend trillions of dollars overnight on standardized terms.
When a default happens, the non-defaulting party triggers close-out netting under the MRA or GMRA. All open trades under the master agreement are accelerated, the collateral is valued using actual sale prices or market quotes, and amounts are netted into a single residual payment due the next business day.5International Capital Market Association (ICMA). What Happens to Repo in a Default The non-defaulting side controls valuation but cannot pile on consequential losses beyond the cost of replacing the trades and unwinding related hedges.
Who Lends and Borrows in This Market
Money market mutual funds are the single largest group of cash lenders. Reverse repos let them earn a return on shareholder cash while keeping holdings short-term and highly liquid. Commercial banks are heavy participants on both sides depending on their daily cash and collateral position.
Hedge funds usually show up on the borrowing side, using repos to finance leveraged positions in Treasuries and other fixed income. When they lend cash through reverse repos, it is often to get hold of a specific security needed for short-selling or another trading strategy. Primary dealers, the firms that trade directly with the U.S. government at Treasury auctions, intermediate most of the daily flow.
Large corporations, pension funds, insurance companies, and sovereign wealth funds also lend cash through reverse repos as part of broader cash management. A 2022 snapshot from the Office of Financial Research put these non-dealer institutions at roughly $75 billion outstanding in reverse repo lending to dealers.6Office of Financial Research. Repo Market Intermediation – Dealer Cash and Collateral Flow Management across the U.S. Repo Market For a corporate treasury holding a few hundred million in operating cash, an overnight reverse repo backed by Treasuries is about as safe as a bank deposit and often pays better.
Bank regulation keeps the market deep even when yields are thin. The Basel III Liquidity Coverage Ratio requires large banks to hold enough high-quality liquid assets to cover expected net cash outflows over a 30-day stress period.7Bank for International Settlements. Basel III – The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools In the United States, the rule is implemented through 12 CFR Part 249.8Federal Register. Liquidity Coverage Ratio – Liquidity Risk Measurement Standards Reverse repos backed by Treasuries count as high-quality liquid assets, so banks can satisfy the ratio while still earning something.
The Fed’s Overnight Reverse Repo Facility
The Federal Reserve runs the Overnight Reverse Repurchase Agreement facility, known as ON RRP, as a tool for controlling short-term interest rates. The Fed sells securities from its portfolio to eligible counterparties and agrees to buy them back the next business day.9Federal Reserve Board. Overnight Reverse Repurchase Agreement Operations The rate the Fed offers acts as a floor on short-term money market rates: no rational institution lends cash to a private counterparty for less than it can earn risk-free at the Fed.
As of early 2026, the ON RRP offering rate is 3.50%, with each counterparty allowed to invest up to $160 billion per day.10Federal Reserve. Federal Open Market Committee Minutes – January 28, 2026 The Fed moves the ON RRP rate alongside its federal funds target range to keep market rates in the band it wants.
Eligible counterparties include primary dealers, money market funds meeting minimum asset thresholds, government-sponsored enterprises, and certain banks. The Federal Reserve Bank of New York sets and updates the criteria. Daily usage of the facility has fallen sharply from its 2022–2023 peaks and now runs in the low single-digit billions on many days, reflecting tighter liquidity and more competitive yields in private repo markets.11FRED, St. Louis Fed. Overnight Reverse Repurchase Agreements – Treasury Securities Sold by the Federal Reserve Light take-up is not a sign of trouble; the facility is designed to shrink when private markets are pricing short-term cash on their own.
What Changes with Central Clearing in 2026 and 2027
Most repo trades today settle bilaterally between the two parties or through a tri-party arrangement in which a clearing bank, usually BNY Mellon, manages the collateral for both sides. The Fixed Income Clearing Corporation, a DTCC subsidiary, is the only U.S. central counterparty that clears repo and debt transactions in government securities. When a trade is cleared through FICC, the original counterparty relationship is replaced through novation: FICC becomes the buyer to every seller and the seller to every buyer, guaranteeing settlement even if one member fails.12DTCC. Centrally Cleared Institutional Triparty Service
The SEC has adopted rules requiring mandatory central clearing for certain eligible secondary market transactions in U.S. Treasuries. After an initial timeline proved too aggressive, the Commission extended the compliance deadlines. Cash market transactions must be centrally cleared by December 31, 2026, and repo transactions by June 30, 2027.13Federal Register. Extension of Compliance Dates for Standards for Covered Clearing Agencies for US Treasury Securities Once the rules are fully in force, a significantly larger share of the $4-plus trillion daily Treasury repo market will flow through FICC or another covered clearing agency. Firms that currently trade bilaterally will need to become clearing members or find a member willing to sponsor their activity, and operational costs will rise in the short term while bilateral counterparty risk falls over the longer term.