Term repos are repurchase agreements that are structured to be in effect for a specific period of time. The one stipulation on the length of time associated with a term repo is that the period must be more than one calendar day. It is not unusual for a term repo to be used in such settings as a money market or a capital market.
The term repo works in a manner that is very similar to any type of repurchase agreement. Essentially, the seller will agree to transfer ownership of specific securities to a buyer in exchange for a specific amount of cash. Inherent in the agreement is that the seller will repurchase those same assets from the buyer at a later date for a larger amount of cash. In the event that the seller is unable or unwilling to buy back the securities on the specified date, the buyer assumes full control of the assets and is free to offer them to other investors.
A term repo usually sets the amount of cash required for repurchase in one of two ways. First, the repurchase amount can be the amount of the original sale plus the a fixed amount that is specified in the terms of the agreement. Second, the repurchase amount can be calculated by adding the amount of the original sale and a specified percentage of the original amount. In either case, the actual cash difference between the amount of the original sale and the repurchase amount due is known as the repo rate. While there are other more complicated means of determining the repurchase amount, these two are the most common.
For the duration of the term repo, the seller is not able to make use of the securities in any way. Only after the securities are repossessed by fulfilling the terms and conditions of the term rep can the seller engage in any further activity with the assets. In the event that the seller defaults on the terms of the repossession, the buyer becomes the owner of record and may trade or hold on to the securities as he or she sees fit.