Repurchase agreements (‘repos’) are undertakings where a party buys securities from a counterparty for a specified price with an agreement that the counterparty will repurchase the securities at a later date. A reverse repo is the flip side of a repo. The term repo or reverse repo may be applied to the same transaction, depending on the perspective of the parties. Repos and reverse repos have similar characteristics to secured lending agreements, and may be said to resemble collateralised borrowing/lending.
However, in repos, title to the security transfers between the parties, which means that on default by one of the parties, the other party may sell the securities to offset the cash debt or hold on to the cash paid to set off the securities debt.
Repos operate in the money market division of the Nigerian market, serving as low-risk, flexible and short-term investments adaptable to a wide range of uses. Repos may be structured to provide for the repurchase of the securities at a higher price or at the same price, but with interest. Repos/reverse repos may be used by market regulators to maintain the liquidity levels of the market and ensure the achievement of long-term monetary policies.
This article first appeared on the website of the Banking Law Committee of the Legal Practice Division of the International Bar Association, and is reproduced by kind permission of the International Bar Association, London, UK. © International Bar Association