A repurchase agreement (repo) is a short-term secured lending transaction in which one party sells securities and agrees to repurchase them at a higher price on a future date — the difference is the repo's implicit interest. In a tri-party repo, a third-party custodian (typically a clearing bank) manages collateral allocation and settlement between the two principals. The Federal Reserve Bank of New York operates the Tri-Party Repo Infrastructure as part of US money-market plumbing.
Repos are the backbone of short-term secured money markets. Economically, a repo is a collateralized loan: the 'seller' (borrower of cash) sells securities (typically US Treasuries, Agency MBS, or investment-grade bonds) to the 'buyer' (lender of cash) and agrees to repurchase them the next day or on a specified date at a price reflecting the repo rate. The difference between the sale price and repurchase price equals the interest on the cash lent. In a tri-party repo, the Federal Reserve Bank of New York (through its Tri-Party Repo Infrastructure) or a custodian bank (JPMorgan Chase or Bank of New York Mellon serve as clearing banks) sits between the cash borrower and cash lender, handling collateral valuation, substitution, and settlement. The New York Fed's tri-party infrastructure processes hundreds of billions of dollars daily — described in detail at https://www.newyorkfed.org/financial-services-products/tri_party_repo. The Federal Reserve's own Overnight Reverse Repo Facility (ON RRP) is a tri-party instrument: the Fed sells Treasuries to eligible counterparties overnight and repurchases them the next morning at the ON RRP rate (currently set at the lower bound of the fed funds target range). This facility sets a floor on overnight rates across the money market. During the 2008 crisis, repo market dysfunction was a critical systemic failure point — leading to significant post-crisis reforms under Dodd-Frank and the OFR (Office of Financial Research) monitoring framework.
Repo rates and the federal funds rate are closely linked — they anchor overnight borrowing costs across the entire financial system. When repo markets function smoothly and repo rates are stable, bank funding costs stay predictable, which flows through to prime rate stability and ultimately to SBA loan and LOC pricing. Repo market stress (as in September 2019 and March 2020) can spike bank funding costs and tighten credit availability.
Same transaction, different perspective. The cash borrower does a repo (sells securities, repurchases later). The cash lender does a reverse repo (buys securities, sells back later). The Federal Reserve conducts 'reverse repos' when it wants to absorb excess reserves — selling Treasuries to money market participants and buying them back, draining cash from the system.
A haircut is the discount applied to collateral value — the repo lender lends less than the market value of the securities to protect against price declines. A 2% haircut on $100M of US Treasuries means the lender advances $98M in cash. Haircuts vary by collateral type: minimal for on-the-run Treasuries (0-1%), larger for corporate bonds (5-10%+) and equities (15-30%).