Repo Finance

Repo or Repurchase is a form of inventory finance in which a Funder purchases goods from a Borrower on a True Sale basis and sells the goods back to them following the expiry of a specified period. The Repo is effectively a cash transaction with a forward contract. The difference between the forward price and spot price is effectively the interest, known as the Repo Rate. The settlement date of the forward contract is effectively the maturity date.

The Borrower, usually a trader, enters into a master purchase and sale agreement (MPSA) with a Funder. The Funder, Borrower and a Collateral Manager may sign a tri-party Collateral Management Agreement. The Collateral Manager, usually a warehouse operator or surveillance company, is employed to control the inventory assets in its storage facility (owned or leased), monitor levels of the commodity and report directly to the Funder.

To mitigate exposure from changes in market price movement, the commodity is usually marked-to-market. Therefore, this allows the Funder to call for additional cash or asset should the price fall. As the Funder has ownership in absolute terms and not just a security interest over the goods, the Funder can sell the goods without any competing claims over the goods if any issues arise (e.g., insolvency of the borrower).

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