A reverse repo is simply the same repurchase agreement from the buyer's viewpoint, not the seller's. Hence, the seller executing the transaction would describe it as a "repo", while the buyer in the same transaction would describe it a "reverse repo". So "repo" and "reverse repo" are exactly the same kind of transaction, just being described from opposite viewpoints. The term “reverse repo and sale" is commonly used to describe the creation of a short position in a debt instrument where the buyer in the repo transaction immediately sells the security provided by the seller on the open market. On the settlement date of the repo, the buyer acquires the relevant security on the open market and delivers it to the seller. In such a short transaction the seller is wagering that the relevant security will decline in value between the date of the repo and the settlement date.
Uses
For
the buyer, a repo is an opportunity to invest cash for a customized period of
time (other investments typically limit tenures). It is short-term and safer as
a secured investment since the investor receives collateral.
Market
liquidity for repos is good, and rates are competitive for investors. Money
Funds are large buyers of Repurchase Agreements.
For
traders in trading firms, repos are used to finance long positions, obtain
access to cheaper funding costs of other speculative investments, and cover
short positions in securities.
In addition
to using repo
as a funding
vehicle, repo traders
"make markets". These traders have been traditionally known
as "matched-book repo traders". The concept of a matched-book trade
follows closely to that of a broker who takes both sides of an active trade,
essentially having no market risk, only credit risk. Elementary matched-book
traders engage in both the repo and a reverse repo within a short period of
time, capturing the profits from the bid/ask spread between the reverse repo and
repo rates. Presently, matched-book repo traders employ other profit strategies,
such as non-matched maturities, collateral swaps, and liquidity management.