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

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!

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.

• Thank you for your response! Do you have any idea why the instructor on Khan Academy may have switched it around in his video (see above)? – user27846 May 22 '20 at 10:51
• Please see edit #1. Hope this helps! – mathsquestions1 May 22 '20 at 11:52
• Thank you so much! – user27846 May 23 '20 at 6:47
• Yeah, sometimes people use the frame of reference of the dealer, and sometimes they use the frame of reference of whoever they’re focusing on, dealer or no, and so the RP and RRP can get flipped when talking about a fund or other dealer counterparty. – dismalscience May 23 '20 at 18:22