The term “Repo” is short for “Repurchase Transaction”.
In a Repurchase Transaction, one party (called the “Seller”) sells an asset to another party (called the “Buyer”) for a price agreed between the two. The asset being sold is usually a bond, although it can also be a share. At the same time as the sale is agreed, the “Seller” also commits to repurchase the same asset (or an equivalent – in other words a fungible – asset) from the Buyer at a later date. This is why the transaction is known as a “Repurchase Transaction”. It is important to note that this sale and simultaneous agreement to repurchase is regarded as being a SINGLE TRANSACTION.
The “repurchase” by the Seller takes place at a different price to the original “purchase” by the Buyer. Usually, but not always, the “Repurchase Price” is HIGHER than the original “Purchase Price”.
The repurchase can take place on a future date which both of the parties agree at the outset. Alternatively, it can take place on demand (usually, the demand of the “Buyer”).
It is important to note that, as a sale of the asset, a Repurchase Transaction constitutes an OUTRIGHT TRANSFER OF TITLE. In other words, the “Buyer” becomes the owner of the asset in question following the sale. The Seller only becomes the outright owner again following the repurchase.
If the Seller defaults during the life of the Repurchase Transaction, the Buyer (as the new owner) can sell the asset to a third party to offset any loss it has suffered. Therefore, in some sense, the asset acts as collateral and mitigates the credit risk that the Buyer has on the Seller.
Most Repurchase Transactions are executed under a Global Master Repurchase Agreement (or “GMRA” for short).
Although they are very different in terms of legal form, economically, a Repurchase Transaction is analogous to a short-term secured loan. The “Seller” would be akin to a borrower (the “Seller” is in need of cash and is willing to provide an asset as security). The “Buyer” would be akin to a lender (the “Buyer” is willing to provide cash and is willing to accept an asset as security).Contact Us