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“Repo” is short term for a sale and repurchase agreement under formal legal agreement one party agrees to sell securities to another party with legal requirement to repurchase equivalent securities in the future, It is widely used in financial markets as an alternative to collateralized lending as it can fulfill the same economic function, while offering greater flexibility and better security. Repo transactions are increasingly being used by central banks of many countries in their own monetary operations and by governments in public debt management and cash management. Key features of repos that motivate their use in government securities include:
Safety. Repo provisions enable almost risk-free placement on a paying basis of available budget funds from the single treasury account with the vetted financial institutions, as well as reduction of public debt servicing costs due to matching the time of receipt and use of funds;
Liquidity. Due to how easy it is to buy and sell government securities in the developed domestic markets, they are transforming into a reliable liquidity management tool for financial institutions. This results in increased demand for government securities which should lead to reduced cost of borrowing for the government.
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