In a repo, the investor/lender makes money available to a borrower, with the loan secured by the borrower`s guarantees, usually bonds. In case of default of the borrower, the investor/lender receives the guarantees. Investors are usually financial firms such as money market funds, while borrowers are not custodian financial institutions such as investment banks and hedge funds. The investor/lender calculates an interest rate called the “repo rate”, gives $X and recovers a higher amount, $Y. In addition, the investor/lender may require guarantees in excess of the amount he lends. This difference is the haircut. These concepts are illustrated in the diagram and in the Equations section. If investors perceive greater risks, they may demand higher repo rates and demand larger haircuts. A third party may be involved to facilitate the transaction; In this case, the transaction is called “tri-repo”.  The repo market is an important source of funding for large financial institutions in the non-custodian banking sector, which, by its size, can compete with the traditional deposit banking sector. Large institutional investors, such as money market funds, lend money to financial institutions such as investment banks, either in exchange for guarantees (or guarantees) such as government bonds and mortgage securities held by the borrower`s financial institutions.
An estimated guarantee value of $1 trillion per day is processed in U.S. repo markets.   Repo transactions take three forms: specified delivery, tri-party and retention (the “selling” party holding the collateral for the duration of the repo). . .