What do participants in the repo market typically use as collateral?

Participants in the repo market typically use securities as collateral, which is essential to the functioning of this market. In a repurchase agreement (repo), one party sells securities to another with the agreement to repurchase them later at a predetermined price. These securities, often government bonds or other highly liquid and stable assets, provide assurance to the lender that they can recoup their funds.

Using securities as collateral mitigates counterparty risk, as the lender can sell the securities in the event of a default. This is particularly important in the repo market, which is a key source of short-term funding for various institutions, including banks and hedge funds. Meanwhile, cash, stocks, and real estate are generally not used in the repo market because they either do not provide the same level of liquidity or are not standard practice for these types of transactions. Cash is typically the end result of a repo transaction rather than the collateral, stocks can be less stable and standardized than bonds, and real estate cannot be easily liquidated in the context of short-term borrowing.