One of the two legs on which a repo transaction is set up. A repo is the sale of a security-i.e., the collateral– (which constitutes the front leg/ opening leg) for a monetary amount with the simultaneous “forward” agreement to repurchase the security (which is the term leg/ return leg). In return for payment of the monetary amount, the buyer (in the repo transaction) receives the collateral (i.e., the agreed number of a debt security (at face value) that will be re-sold (to the original seller) at a specified future date for a specific price (the face value/ principal) plus accrued interest (delivery versus payment).

In this sense, a repo is simply a temporary exchange of debt securities for money between two parties where the amount of money on the return leg is higher as it includes the repo return. On the trade date, a repo transaction is divided into two separate security trades, one for the front leg and the other for the term leg. At settlement of the front leg, the credit amount (money) is paid by the cash provider (lender) to the borrower while the security is transferred in a reversed direction, resulting in a cash and security position.

At settlement of the term leg, the face value of the securities plus interest (calculated at the repo rate) is transferred, with the cash position and the security position are exchanged back. An additional cash position will be created out of the payments adjusting for the interest arising between the two repo legs (where its settlement date coinciding with the coupon date for the related security position).