A repo is a transaction wherein securities are sold at a particular price by one party (repo seller) to the other (repo buyer) with a commitment on the repo seller's part to repurchase the equivalent securities from the repo buyer (and a corresponding commitment on the repo buyer's part to sell the equivalent securities back to the repo seller) on a certain date and at a certain price, both such date and price being fixed as part of the same transaction.

Repo in government securities are fully-assigned, with collateral securities identified at the initiation of the trade. Repo proceeds include accrued interests. Typically repos are conducted as 'classic repos' with both initial and variation margin applied on market values of collateral securities. Variation margin may be called when the fall in value of collateral securities exceeds a mutually agreed margin threshold. Collateral securities may also be replaced or substituted at any time upon mutual agreement, however this is rarely done in the market. Coupon income received during the term of the repo may be returned by the repo buyer to the repo seller via 'manufactured dividend' or paid in cash on the date of coupon payment by the repo buyer to the repo seller. A popular treatment however is to conduct 'coupon reinvestment' whereupon the repo buyer retains the coupon payment and treats it like a partial early repayment of repo proceeds by the repo seller.

Repo may either be "cash-driven" or "securities-driven". In a cash-driven repo, the repo transaction is used to obtain cash funding. Securities used as collateral are not specific and usually consists of off-the-runs. For securities-driven repo, repo buyers are specifically seeking a particular identified security typically on-the-runs or benchmark securities mainly for the purpose of covering short-sale positions. Both types of repo transactions are transacted between market participants and the central bank via standard repo and benchmark repo auctions respectively.

A standard repo auction is basically cash-driven and conducted daily for the purpose of liquidity management. The underlying collateral (commonly known as general collateral), mostly off-the-run issues are specified in each auction. The lowest bidder in terms of repo rates will be allotted first until the auction amount is fully allotted. Shortest maturity and highest credit quality collateral are allocated first to lower repo rate bidders before longer-term and lower-credit ones.

Repo auctions are conducted by Bank Negara Malaysia to complement clean money market borrowing, as repo rates are generally traded lower by 2 to 3 basis points compared to an unsecured or 'clean' borrowing over the comparable maturity term. On occasion, Bank Negara Malaysia will also provide liquidity under its standing facility using standard repos, typically bilaterally with market participants that experience liquidity shortages at the end of the day.

Benchmark or 'specials' repos are securities-driven transaction offered by the central bank to effectively lend specific securities, which in turn are either used to cover short selling activities or potential settlement failures by day-end. Bank Negara Malaysia conducts benchmark repo auctions twice a week on Tuesdays and Thursdays at T+2 settlements. Securities-driven repo auctions are conducted separately for each security on offer. Interested market participants may also approach Bank Negara Malaysia directly via 'reverse enquiries' to request specific securities via bilateral repos, subject to availability. Due to the scarcity and high demand of MGS benchmarks, securities-driven repo rates are transacted below normal repo rates, typically at least 10 basis points spread below the equivalent average unsecured interbank money market rates.