CFM17155 - Repos: commercial background: introduction

What is a Repo?

A repo is an agreement between two parties under which one (the original owner) agrees to sell securities ( CFM17080) to another (the interim holder) for cash and the original owner agrees to repurchase the same or equivalent securities ( CFM17270) at a later date.

The term also covers the case where there are two agreements, one for sale and one for future repurchase, entered into at the same time. This arrangement is sometimes known as a sell/buyback agreement. See CFM17210 for the tax definition.

The repurchase price will normally be equal to the

• original sale price (which will be just below the market value of the securities – see CFM17170), plus
• an increment equivalent to interest on a loan of the same amount for the period of the repo.

The repurchase price thus bears no relation to the market value of the securities at the time of the repurchase.