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Understanding repurchase agreements
How the money market industry utilizes the product to add value to their portfolios
Key Takeaways
- Repurchase (repo) agreement transactions are commonly used by money market funds as short-term investments.
- Repo agreements are contracts for the sale and subsequent repurchase of securities and functionally represent a short-term loan that is (over) collateralized by the securities sold.
- Collateral in repo agreements typically includes U.S. Treasuries and other government securities, as well as a range of "nontraditional" collateral including, but not limited to, corporate bonds, asset backed fixed income securities, and equity securities.
- Fidelity's money market mutual funds enter into repos only with counterparties that Fidelity’s research team determines to represent minimal credit risk. Fidelity money market funds also participate in repo agreements with the Federal Reserve (Fed) utilizing the Overnight Reverse Repo Facility (ON/RRP), in which the Fed acts as the repo counterparty.
- Several industry-standard methods utilized to settle and clear repurchase agreement transactions ensure the delivery of adequate and eligible securities against the required cash payments by the parties.
- The repo "market" is in fact comprised of several markets with differing settlement and clearing mechanisms. In December 2023, the SEC adopted a final rule that will require the central clearing of virtually all treasury repo activity by June of 2026, representing an important change in market structure.
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Understanding repurchase agreements
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You could lose money by investing in a money market fund. An investment in a money market fund is not a bank account and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Before investing, always read a money market fund’s prospectus for policies specific to that fund.
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