New question about Repo market

[jiminboston]

Hi, I had a newbie question regarding the repo market and would love some practical advice on how it works beyond just the theoretical.

Why would the repo seller want the cash? Why would they want to offload bonds/securities on their books? I've heard that this helps them fund their business, but how?

I would assume if cash balances fluctuate wildly, how can a firm rely on this as a sustainable source of funding?​

I was told by an Admin to post this here where it can be moved to the proper forum. Thank you!

 

[PL]

Hello there,

As far as I know every item in asset side of BS need to be funded (debt or capital). In order to buy a bond you must find a source to fund this investment, and a repo facility is one source. For example you may loan overnight the amount you need at the beginning, you buy the bond and then you repo the bond and the cash you receive from the repurchase transaction you pay back the initial loan.
Additionally, bonds are used for liquidity buffer.
Suppose you have in your portfolio unencumbered bond position with cash value equal to 100, you want to give new retail loans equal to 40, you dont have any other liquidity and you dont want to sell the bonds. You may repo bonds with cash value of 40 and with the amount you receive you create a new loan of 40 to customers.

This is my thought regarding the repo facility.

Best Regards,
PL