Repurchase (repo) agreement

Repurchase agreement is a kind of agreement between a seller and abuyer, whereby the seller agrees to repurchase government securities at anagreed price and at a stated time. In other words, the dealer or bank sells thesecurities to an investor with a temporary surplus of cash, agreeing to buythe same securities back in the negotiated date.Repurchase agreement, also called REPO, is widely used both as amoney market investment vehicle and as an instrument of monetary policy bythe Central Bank. Where a repurchase agreement is used as a short-terminvestment, a bank or a dealer borrows from an investor. Rates and maturitydate are negotiated directly by the parties involved.Shortly, repo widely used as an instrument of money market. TheCentral Bank of The Republic of Turkey (CBRT) uses repo for open marketoperations as a method of the money supply, when it wishes to raise themoney supply temporarily.On the other side, banks get loans from individuals using governmentsecurities. For this, banks and investors agree to repurchase the securities ata specified time with a price including interest.There are two different views on the legal standing of repo. The firstone considers repo as the purchase of securities whereas the second opiniontakes repo as a collateralized loan. According to first opinion, repo is a sale ofsecurities and an agreement to repurchase them in the future. The secondopinion stands to the fact that, repo is a financing transaction in which therepoed securities are used as collateral for a loan. The lender of money ismotivated by a desire to borrow, not to buy securities.