CFM17160 - Repos: commercial background: commercial uses

Why would a company enter a repo agreement?

The original owner under a repo is normally a company possessing securities that wishes to borrow cash. Because it is effectively using these securities as collateral for a loan, it can borrow more cheaply. Hence this type of repo is often known as a “general collateral” repo. It is described in more detail at CFM17170.

A “special collateral” repo is less common. It is an alternative to, and often economically identical to, a stock loan collateralised by cash. It is driven by the desire of a person to possess particular securities for a limited period of time, perhaps to settle a short sale. However, unlike a transfer under a stock loan, a repo involves an actual sale of the securities.

The Bank of England uses repo to control liquidity and to set interest rates; it supplies liquidity (cash) to the money markets by repoing in collateral securities. The Bank of England base rate is officially known as its repo rate.