Repo: Explained

Repo (repurchase agreement) is essentially collateralized lending which is organised as a sale and purchase of securities. One party brings the liquidity (reserves) and the other party brings the collateral (securities).

Better storer of cash

For a big pension fund, repo can serve as a more secure place to keep excess reserves/cash as it is collateralised, as compared to bank deposits which are not insured for big deposits.

Dynamics of repo

To participate in repo, you dont have to be a bank or a member of fed reserve system,

it is for everybody. Almost all repo transactions have a security dealer in between. Repo is not a primarily brokered market like Fed Funds. In repo, all one has to make sure is that the collateral is good. The collateral though can be anything, from Treasuries to MBS to ABS to GC.

In repo once you have security you can do anything with it, trade with it if you want -- you are only liable to give it back next day (or when the term ends for term repo). Same with cash.

Utility

Banks which are holding securities (collateral), instead of holding deposits against them - fund them by putting them in repo. Repo can be the liability which is funding these securities.

Who gets margin?

Rule is that the person lending money gets the margin - not the person who is lending collateral (money is higher in the hierarchy). Margin is decided by the fluctuation levels of the collateral (a corp bond will have higher margin than treasuries).

Funding gaps

If you are holding a security and suddenly repo goes from 2% to 15%, you are left with a funding gap. If you can't find the rest of the 13% of funding, you will have to sell the security at whatever price you can - which may lead to a fire sale.

We saw a repo blowout in September, 2019 when repo did spike to around 10% levels overnight. That was a blip event and the dealers didn't panic. But had that 10% rate remained for a few more days (and if the Fed didn't intervene), things could've gotten bad.

We have evidence from 2008 how a change in the haircut margin can lead to disasters. AAA MBS haircuts were revised at that time from 5% to 10% to 15%, which led to financing pressures that showed up across assets.

References: 
http://sites.bu.edu/perry/blog/current/

https://www.amazon.com/New-Lombard-Street-Became-Dealer/dp/0691143986

https://www.financialresearch.gov/working-papers/files/OFRwp2014-04_Pozsar_ShadowBankingTheMoneyView.pdf