Why are there two opposite definitions of repo transactions in circulation? Which is correct?

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** Sources that imply the party doing reverse repo buys securities and sells them later: **

> The party engaging in reverse repo first buys the securities, which serve as collateral for the cash they’re sending to the other party, and then they ultimately receive a return on that cash when the transaction is unwound,

https://www.businessinsider.com/personal-finance/what-is-reverse-repo?IR=T

> The party doing the reverse repo contracts to buy a security at a particular price and to sell it back at a predetermined price and time.

Elton et al., “Modern Portfolio Theory and Investment Analysis” 9e, p. 13

**Sources that imply the party doing reverse repo sells securities and buys them later:**

> For the party originally selling the security (and agreeing to repurchase it in the future), it is a reverse repurchase agreement (RRP).

https://www.investopedia.com/ask/answers/041615/what-difference-between-repurchase-agreement-and-reverse-repurchase-agreement.asp

> A reverse repurchase agreement conducted by the Desk, also called a “reverse repo” or “RRP,” is a transaction in which the Desk sells a security to an eligible counterparty with an agreement to repurchase that same security at a specified price at a specific time in the future.

https://www.newyorkfed.org/markets/rrp_faq

What is going on?

In: 1

2 Answers

Anonymous 0 Comments

They are describing the same thing, just from two different perspectives.

For example:

1) A sales transaction is when a seller delivers a product to a buyer in exchange for cash.

2) A sales transaction is when a buyer delivers cash to a seller in exchange for product.

Both the above are equivalent. The RRP has 2 parties (ELI5) – so the description can be written with either party as the subject.

Anonymous 0 Comments

Having traded repo for a couple decades. The first answer is correct. The transaction has two sides, the repo side and the reverse repo side.

The repo provides securities/collateral and receives cash.

The reverse repo provides cash and receives securities.

It’s treated more like a borrow/lend vs a buy and a sell, but the technical definition is that it is a buy and a sale (and a sale and a buy for the other side).