Repo or repurchase agreement is a contract, in which one party conduct a securities trading, with an agreement that he will buy back the securities in particular period at particular price. Generally, the price in the redemption time is higher than the selling price. In this case, the securities are stock, bond,T-Bills etc.

Lots of repo transactions is overnight transaction. This means that the repo's agreement period is only for one day. Meanwhile, repo transaction with longer period, known as term repos, which generally can be extended to one month or more.

Basically, repo mechanism is equals to debt transaction with guarantee (secured loan). This is because of the money transfer transaction from buyer to seller, which shown that the debt is received, there is a securities delivery from seller to buyer, which shown that the collateral is given, there is an agreement on when the securities buyback will be conducted, which shown the debt period, and there is a surplus between securities redemption price and the selling price, which is considered as debt interest.

Example of repo transaction: broker dealer use repo as an alternative to gain cash. Conducted by selling his reserves (inventory) in form of securities, with a buyback agreement. Meanwhile, buyer of this securities generally come from institution which have extra cash, and want it to be invested in short-term investment.

Reverse Repo

This term is used to describe the opposite transaction of repo. If securities agreement with buyback agreement is called repo transaction, then reverse repo is a securities purchasing offered in repo transaction to be sold back.

(sw-rs/mh-tr)

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