Handbook of Finance: Financial Markets and Instruments

Chapter 72. Repurchase Agreements and Dollar Rolls

FRANK J. FABOZZI, PhD, CFA, CPA

Professor in the Practice of Finance, Yale School of Management

STEVEN V. MANN, PhD

Professor of Finance, Moore School of Business, University of South Carolina

Abstract: Access to short-term financing and the ability to borrow securities to cover short positions are essential elements to a liquid, well-functioning bond market. Repurchase and reverse repurchase agreements are mechanisms used by dealers to accomplish these needs. Repurchase agreements occupy a central position in the money market and provide a relatively safe investment opportunity for short-term investors. Structured repurchase agreements introduce variations on the basic agreement and are designed to accommodate specialized clienteles of users. Similarly, dollar rolls developed in the mortgage-backed securities market because of the need to borrow these more complicated securities to cover short positions.

Keywords: repurchase agreement, reverse repurchase agreement, repo rate, overnight repo, repo term, repo margin, collateral, delivered out, hold-in-custody (HIC) repo, triparty repo, general collateral, special collateral, buy/sell-back agreement, structured repurchase agreements, dollar roll, pass-through, TBA (to be announced), collateralized mortgage obligation (CMO), forward drop, prepayment speed

One of the largest segments of the money markets world-wide is the market in repurchase agreements or repos. A most efficient mechanism ...