A local library includes the code for the associated .mtb file, and the BSP/library is used only for a specific application. The local BSP/library is stored in the libs subdirectory of the specific application. These BSPs/libraries do not need to be checked into source control. All the code can be re-downloaded at any time from the information in the .mtb file.
If you change libraries to be local to an application (see Add library (single-core application) later in this guide), then the source code for these are located in the libs subdirectory inside the application directory.