How to Account for Reverse Repurchase Agreements

The repo rate is small due to the risk involved.

A repurchase agreement, also known as an "RP" or "repo," is an agreement between parties to loan or borrow funds over a short-term period, usually overnight. A reverse repo is the opposite transaction. For instance, when the U.S. Fed issues repurchase agreements, it's lending money --- usually overnight. When the Fed needs to borrow funds, it issues a reverse repurchase agreement, which is the exact same transaction in reverse. Repos are primarily used between institutions with high-quality credit.

Instructions

1. Identify the counterparties involved. The issuer of the reverse repurchase agreement is considered the borrower of funds; the issuer of a repurchase agreement is considered the lender of funds.

2. Identify the correct line item used to account for reverse repo agreements. Usually this amount is included on the balance sheet under "Amounts Due to Banks," "Other Borrowed Funds" or even "Customer Deposits," depending on the nature of the counterparty relationship. You're able to find this in the "Chart of Accounts" for your organization's general ledger.

3. Input the full amount of the reverse repo as a liability on the balance sheet. Because reverse repurchase agreements are issued when a company wants to raise or borrow capital, the issuing company must include them as a short-term liability outstanding to the counterparty on file with the agreement.

References

• New York Fed: Repurchase and Reverse Repurchase Transactions
• ING: Accounting Policy