Repo Advantage
Security
The collateralised nature of a repo trade means greater security for the cash investor. Even if the dealer fails to repay cash invested, the investor may liquidate the collateral to offset the loss. Please see Risk Involved for more details.
Flexibility
A liquid general collateral market exists in most major currencies with maturities ranging from one day to one year. Supposing an investor wanted to invest € 35,643,700 for 47 days, it would be difficult to find CDs (certificates of deposit) or commercial paper that could satisfy this need. The only alternative to a repo would be the unsecured deposit market.
Diverse and Competitive Yield Structure
Depending on the investor's criteria regarding collateral quality and delivery structure, yields may vary from sub-LIBID to LIBOR or even higher. By careful assessment of counterparty credit quality and delivery mechanism, investors can find the investment vehicle that suits their needs.
Efficient use of collateral
The collateralised nature of the repo transaction means that the required capital is practically zero. This makes for a much more capital-efficient instrument and enables institutions to leverage their capital more effectively. This only applies where the legal agreement meets certain enforceability standards.
Different repo customers use repo for different reasons. For instance, while central banks use repos for liquidity management and monetary signalling policy, leverage clients such as hedge funds may use repo for financing purposes while bond portfolio managers would be more attracted to the yield enhancing properties of a repo transaction.
The main uses of repos are:
Also see Who is Involved and Driving Repo Demand for more detail of specific uses.
