What is Repurchase Agreement in Stocks?
Understanding the Repurchase Agreement in Stocks
A repurchase Agreement or commonly spoken repo is one form of investment contained in the world of stocks.
Repo is a loan agreement with collateral shares or debt messages. If the borrower is unable to pay the loan at maturity, the lender has the right to confiscate the shares used by the borrower.
Repo scheme is to use shares as collateral for certain loans. Generally, an industry sells repos that can be purchased by individual investors.
Basically, this system is the same as pawning objects for example in pawnshops. The difference is that the legacy used is the shares or debt messages that the industry has.
Generally, if the borrower uses shares as collateral, the loan value is 50% of the total shares used.
Meanwhile, if using The State Debt Message ( SUN) or bond loan value can reach 70%. Not only the type of guarantee, the good name of the industry whose shares or debt messages are used as collateral also influences the number of funds that can be lent.
For example, PT A needs funds to improve its business therefore PT A filed a repo at PT B to borrow some Rp100 million in cash.
PT A owns SHARES of PT C Tbk worth Rp200 million. The shares of PT C Tbk were then used as collateral to borrow funds to PT B. As compensation for the loan, PT A offers interest of 12% per year to PT B.
In the transaction, there is a set period of time. For example, if the loan period is 1 year, until PT A is obliged to return the money borrowed in that period.
If the funds have been returned until the shares of PT C Tbk are used to be returned. Otherwise, the shares will be confiscated by PT B and their ownership transferred to PT B.
Repo at a glance is similar to call and put options on stocks. The difference is that when buying call or put options investors are entitled to carry out transactions.
Entitled means not required. While in the repo, the person carrying out the repo must buy back the mortgaged shares.
Is the Repurchase Agreement Convenient?
Basically, a repo is not something that is illegal. Repo is allowed in the investment world because the system is also quite clear and no different from other mortgage systems.
It's just that because there is a considerable risk in the repo is the risk of capital market fluctuations. This risk often makes repo investors lose money. Therefore, repo is often mistaken as an uncomfortable investment let alone thought to be listed in the type of investment illegal.
Let's compare the repo to taking credit in the bank. If the bank lends funds with the collateral of a house, the price of the house is to be relatively normal. So that in the short or long term the bank does not need to be very afraid of the depreciation of the price of collateral owned by borrowers.
While in the repo, the object used is a valuable message that fluctuates quite large.
If the shares are used as collateral until the risk of borrowing will continue to be large. You must have known that stock investments are investments that are categorized as high risk.
This is an alibi why the loan provided in the repo with stock collateral only reaches 50% of the value of the shares used. When at any time the value of the stock falls extremely, the investor has a reserve of 50% of the value of the shares used.
But on certain issues, many stocks whose value can fall to extremes let alone lower than 50%. If the matter is intertwined until the investor can lose if the borrower does not pay the payment at maturity.
This is one of the real examples of risks that are entwined in repo transactions. But that does not mean repo is a fraud or investment illegal.
Repo is not an illegal transaction, it's just that there is no formal provision to override the repo. Each industry that produces repo is only required to notify the repo to the Indonesia Impact Exchange (IDX). Therefore, there is no guarantee in repo transactions.
For example, a kind of BUMI repo problem in 2008. At that time BUMI shares had a very large price.
In that period PT Bumi Resources Tbk has a repo of Rp6.3 trillion that is due and has not been repaid. Unfortunately, Bumi's share price suddenly fell to extremes, causing industrial conditions to be chaotic.
Such extreme price depreciation has especially messed up the Indonesian capital market.
As a result, BUMI's shareholders are concerned because the industry is unable to return the borrowed funds.
Although investors sell all Bumi shares that are collateralized, the proceeds of the sale will be far below the value borrowed by PT Bumi Resources Tbk.
Choosing a Trusted Industry:
In each investment, there is no guarantee that the investment product is comfortable. Every investment is risky.
The risk can be reduced but cannot be eliminated. The subject that can be tried is to reduce investment risk, one of which is by sorting out a trusted industry.
Each investor should not indiscriminately sort out investing in repo issued by a particular industry.
Not only that you can also manage your portfolio well,
so even if there is a detrimental repo, you still have other investment reserves that can sustain losses. Do not let all your investments run out because of losses entwined in the repo.