What is a 'Retail Repurchase Agreement'

A retail repurchase agreement is an alternative to traditional savings deposit. Under a bank-issued retail repurchase agreement, an investor buys a pool of securities, usually U.S. government or agency debt, for a term of fewer than 90-days.

After the 90-day period, the bank repurchases that pool of securities at a premium. The extra income earned from the transaction is analogous to the interest an investor would gain from a traditional savings deposit. The pool of securities represents collateral that ensures future repayment. 

BREAKING DOWN 'Retail Repurchase Agreement'

A retail repurchase agreement is sold in small denominations of $1,000 or less. The assets are sold and then repurchased by the lending institution. In contrast, a wholesale repurchase agreement (Repo), are sold to large investors and institutions in denominations of $1 million or more. Here, the assets act as collateral and do not change hands. The most common underlying asset are U.S. Treasury securities, but collateral may include Federal Agency debt, mortgage-backed securities, and corporate securities.

The retail and wholesale repurchase markets developed in the 1970s and 1980s. They were a means for large securities firms and banks to raise short-term capital during an era of steadily rising interest rates. The repo market has grown to become an integral part of the U.S. financial system’s plumbing. It is a place where large financial institutions with significant holdings of government bonds can use those assets as collateral to meet their short-term financing needs.

The Growth and Risks of Repurchase Agreements

In 1979, U.S. banking regulators exempted retail repurchase agreements from interest-rate caps. In 1981 banks and savings and loan institutions began offering these investments to retail investors at premium rates. The retail repurchase agreements attempt to compete with money market mutual funds for depositors. By September of 1981, the total amount of retail repurchase agreements outstanding was $13.3 billion.

In 2017, The Securities Industry and Financial Markets Association (SIFMA) found that there is a $2.3 trillion national amount in repurchase agreements. 

In this environment of quickly rising interest rates, retail repurchase agreements may be a convenient way for retail investors to earn higher returns on investments, which were still relatively liquid and safe. However, unlike traditional deposits, retail repurchase agreements are not protected by Federal Deposit Insurance Corporation (FDIC) insurance.

While secure government and other debt back the retail repurchase agreements, the investor's claim on that collateral is not always explicit. Investors in retail repurchase agreements should therefore always trust the soundness of the issuing financial institutions.

Retail Repurchase Agreements vs. Money Market Funds

A popular alternative to retail repurchase agreements is a money market fund. A money market fund is an investment whose objective is to earn interest for shareholders while maintaining a net asset value (NAV) of $1 per share. The makeup of a fund’s portfolio is short-term, or less than one year, securities representing high-quality, liquid debt and monetary instruments. Investors can purchase shares of money market funds through mutual funds, brokerage firms and banks.

Money market funds allow investors to invest in government securities, tax-exempt municipal securities, or corporate debt securities on a short-term basis. The total size of the money market fund industry has grown to more than $2.8 trillion in 2017, according to the Securities and Exchange Commission.

  1. Accelerated Share Repurchase - ...

    An accelerated share repurchase is a specific method by which ...
  2. Direct Repurchase

    Direct repurchase is the buying of shares in a publicly-traded ...
  3. Investment Securities

    Investment securities are securities (tradable financial assets ...
  4. Government Security

    A government security is a bond (or debt obligation) issued by ...
  5. Retail Fund

    A retail fund is an investment fund with capital invested by ...
  6. Credit Agreement

    A credit agreement is a legally binding contract documenting ...
Related Articles
  1. Investing

    Repurchase Agreement

    A repurchase agreement is the equivalent of a short-term collateralized loan. An owner of marketable securities sells those securities to a buyer for cash. As part of the deal, the seller agrees ...
  2. Insurance

    The Share Buyback Report: The Financial Sector

    Examine historical buyback data from the financial sector to determine which quarters and companies contributed the most to repurchase activity.
  3. Investing

    Skyworks Announces $500 Million Stock Repurchase

    Along with a Q1 earnings beat, Skyworks announces a newly approved stock repurchase plan.
  4. Investing

    The Share Buyback Report: The Energy Sector (XOM, CVX)

    Examine historical share repurchase data for the energy sector. Review buyback activity over time, and find out which companies return the most capital to shareholders.
  5. Investing

    Are Share Buybacks Propping Up the Market? (AAPL, MSFT)

    Companies are repurchasing their own shares at a rate not seen in nearly a decade, prompting observers to fret that demand for equities is not as strong as the past six weeks' rally would suggest.
  6. Financial Advisor

    What to Tell Clients About New Money Market Rules

    New money market rules will have little impact on clients. Here's what to tell them if they ask.
  7. Investing

    Money Market Mutual Funds: A Better Savings Account

    A good alternative to the traditional savings account is the money market mutual fund. It's easy, safe and has better returns. Learn more today.
  8. Retirement

    Money Market vs. Short-Term Bonds

    Short-term bonds typically yield higher interest rates than money market funds, so the potential to earn more income over time is greater.
  1. How do share redemptions and repurchases differ?

    Share repurchases happen when a company purchases shares back from its shareholders. Redemption is when a company requires ... Read Answer >>
  2. What are the 9 major financial institutions?

    There are nine major types of financial institutions. Understand the major types of financial institutions that exist and ... Read Answer >>
  3. What is the difference between an investment and a retail bank?

    Learn the primary differences between retail banks and investment banks by examining the business activities, type of clients ... Read Answer >>
  4. How do I calculate a bond's modified duration using Excel?

    Understand the benefits of investing in a money market mutual fund, and learn why investors use this type of account in volatile ... Read Answer >>
  5. Why would a company buy back its own shares?

    Learn about share buybacks and the reasons a company might choose to repurchase its own stock, including ownership consolidation ... Read Answer >>
Trading Center