Somewhere above a certain cash balance, an uncomfortable thought arrives: every deposit is an unsecured loan to a bank, and diversification only divides the problem.

Repo answers that concern directly.

You place cash with a bank not unsecured, but against a portfolio of government bonds and eligible securities as collateral, with a haircut in your favour. If the bank fails, you keep the bonds.

This is big-boy stuff. It's how banks, funds and central banks lend to each other, and it's available further down the size spectrum than most treasurers assume.

The mechanics, without the mystique

As with all trades, a Repo has two sides. A borrower (in this case the bank), who sells securities to raise funds, and enters into an agreement to repurchase the securities at an agreed price at a future date. This is the repo side of the trade.

Reverse Repo is the other side of the trade. You buy securities from the bank today and agree to sell them back at a set price at maturity; the price difference is your interest.

Tenors range from overnight to a few months.

The collateral (typically government bonds, but can be much broader) is delivered to you or, far more practically, to a tri-party agent (the international custodians and clearers run this as a service) who values it daily, enforces the haircut, and calls for margin if values drift.

These trades have their own documentation. A market-standard Global Master Repurchase Agreement (GMRA) requires a negotiation and legal review at the outset.

But the operational lift, once docs are in place and the tri-party account exists, is close to a deposit. Once in place, repo activity removes the bank credit risk, without the complexity of managing a broadly diversified investment portfolio, and with lower fees than an MMF.

The honest trade-offs

  • Yield Typically at or slightly below unsecured lending rates, because you're giving up the compensation for credit risk you no longer take; secured is the entire point, and in stressed markets repo rates can actually improve as everyone wants collateralised lending.
  • Costs Tri-party fees, the GMRA legal work, and minimum ticket sizes that make the economics sensible somewhere in the tens of millions of placeable cash.

Residual risks worth considering include:

  • Collateral quality This is where your collateral schedule and GMRA negotiation come into play. This dictates what collateral the bank can give you, and at what haircuts. A loosely defined schedule and you run the risk of the bank providing lower quality securities as collateral.
  • Margining As collateral value rises and falls, the counterparties post margin (cash or more collateral) to ensure credit risk remains mitigated. This is a small operational tail, which the tri-party agent automates, but it brings with it the need to stress collateral pricing and assess liquidity implications of potential margin calls.

Where it fits in the menu

Repo slots between government MMFs and direct T-bill ownership: more operational setup than a fund, more counterparty engineering than a bill, and in exchange, secured exposure with deposit-like flexibility on tenor. For the reserve tier of a large cash pile a repo line at one or two banks alongside funds and a bill ladder is what a mature, boring, resilient structure looks like.

MMFs, T-bills and CP are all mechanisms to diversify away from bank exposure. Repo gives you similar protection, but does so without having to move funds away from existing bank relationships. This feature can be important when maintaining strong banking relationships is a priority.

The same job at three sizes

Start-up. Not this instrument: the minimums and setup don't fit. … read more show less

A government MMF delivers a similar de-risking instinct in an afternoon. File the concept for later.

Established mid-market. Rarely needed, but it becomes a realistic option when cash balances approach €100mn. … read more show less

One GMRA, one tri-party account, and suddenly you can continue to spread your cash across the same small panel of banks, without having to worry about growing counterparty or concentration risk.

Large corporate. Standing repo capacity across several banks, used tactically as spreads move. … read more show less

Integrated with the securities portfolio, since the same custody plumbing serves both.