Who holds the Reverse Repo and Repo respectively in a Repurchase Agreement?

Question

According to investopedia.com in this definition

A reverse repurchase agreement, or "reverse repo", is the purchase of securities with the agreement to sell them at a higher price at a specific future date. For the party selling the security (and agreeing to repurchase it in the future) it is a repurchase agreement (RP) or repo; for the party on the other end of the transaction (buying the security and agreeing to sell in the future at a specific date and at a higher price) it is a reverse repurchase agreement (RRP) or reverse repo.

However while watching this Khan Academy video from 6:29 to 7:30 (although watching from 0:00 to 6:29 may also be helpful for contextual purposes), it seems that the instructor is switching the definition around where it would be:

For the party selling the security (and agreeing to repurchase it in the future) it is a reverse repurchase agreement (RRP) or reverse repo; for the party on the other end of the transaction (buying the security and agreeing to sell in the future at a specific date and at a higher price) it is a repurchase agreement (RP) or repo.

Thank you everyone for your time and efforts. I really appreciate it!

Answer 1

A repurchase agreement (or repo) is the sale of securities for cash, but with a commitment to repurchase them later at a specified price at a future date.

This is practically a collateralized loan, and I find it conceptually helpful to think of it that way.

If you are taking out the loan, it's a repo for you. You are agreeing to repurchase the security (usually U.S. Treasuries) that you posted as collateral at a later date.

If you are giving out the loan, it's a reverse repo.

Note that this terminology is in terms of the dealer's viewpoint. If the dealer borrow money, it's a repo. If the dealer lends money, it's a reverse repo.

Edit #1 -----------------

Let me respond to the first comment. Although I agree with you that it is confusing, I'm not sure there is an inconsistency per se, in what the lecturer is saying.

Other people can jump in, but I believe what's going on in the video is the following.

Suppose I'm taking out a loan from you that I will pay back in a year. I am "promising" you that I will pay back the principal plus interest. As a proof of this promise, you have a debt contract that enters into your balance sheet as an asset (for me it's a liability). You are the holder of this debt contract.

Similarly, say I enter into a repo transaction with you, posting as collateral a watch (just like in the example given in the video). The "promise" here is that I am going to pay back cash. This promise, along with the watch, enters into your balance sheet as an asset. You are the holder of the repo contract.

But unlike a simple debt, there's another side to this "promise": if I give you your money, you have to give me my watch back! The reverse repo contract essentially represents this side of the promise, and hence I am the holder of the reverse repo contract.