During my 2019 Fall internship at Goldman Sachs, I worked in the Corporate Treasury division. The role of that division is to provide appropriate funding to support all-firm wide activity. In particular, it extensively uses the repo markets in order to do that. So what do repo markets do?

Repo markets play an important role in the facilitation of the flow of cash and securities around the financial system. There are five main economic functions:

1. Provide a low-risk option for cash investment. Reverse repos are used heavily by money market funds, asset managers, central counterparties and institutional investors or corporates. Reverse repos are a very flexible liquid investment that can be structured as one-day transactions that can be rolled over.

2. Transforms the collateral. Cash can be transformed to specific securities and vice-versa. The party receiving the collateral can reuse it. For example, it can sell the securities outright, obtain cash through another repo, use them for margin calls.

3. Supports the cash market efficiency and liquidity. Repos are used by market participants looking to exploit pricing discrepancies and finance trading activity which supports market liquidity. In doing so, they contribute to the price efficiency of underlying markets. For dealers, repos are essential to support their market-making activities and to fund the trading inventories.

4. Facilitate the hedging of risk. Repos can be used to hedge or modify the risk profile of portfolios. Investors can finance the hedging of risk on securities, or investors can borrow cash against government bonds and use the proceeds to reinvest in bonds of different duration.

5. Enables investors to monetize liquid assets. Banks and other financial institutions use repos in liquidity management to cover temporary shortfalls in cash flows.