Money Markets: Repurchase Agreements

Repurchase agreements, or “repos,” are contracts for the sale and future repurchase of a pool of securities. On the termination (repurchase) date, the seller repurchases the securities and pays interest for the use of the buyer’s funds. Fidelity’s money market mutual funds primarily use tri-party repos, which consist of a buyer, a seller, and a tri-party clearing bank (Exhibit 1). As protection against the risk that a seller will not fulfill its obligation to repurchase the securities, the securities are held as collateral in a separate account at a tri-party clearing bank, which acts as a repo custodian, and priced daily (marked to market) to maintain a value at least equal to the repurchase price (which includes accrued interest). The seller is required to post additional collateral when the value of the securities falls below the agreed-upon level of overcollateralization, known as the “haircut” or “margin.”

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