Buy Sell Backs

Buy/sell backs - what are they?

A buy/sell back is a spot sale of a security with a simultaneous forward purchase. Buy/sell backs are sometimes used instead of repo transactions. The main difference between the two structures is that in a repo, the repo rate is used to determine the sum of money that is repaid at maturity. In a buy/sell back the deal is quoted as a spot and forward security price. The actual collateral amounts and cash payments are the same in both structures.

Here is an example:

In a repo the interest amount at maturity is calculated in the normal way using the repo cash amount, repo rate and day count.

In a buy/sell back the purchase price of the bond would be 100%. The forward sale price after 30 days would be $10,008,333.33 or 100.0833333%. (This is the repo amount at maturity less the coupon accrual).

Settling the forward bond sale would mean adding the accrued interest of $33,333.33 to the forward sale price of $10,008,333.33 this gives $10,041,666.67.

It means the cash amounts whether the deal is a structured as a repo or buy/sell back are identical.

Buy/sell backs can present difficulties involving coupon payments, right of set off, the right to call margin and the right to substitute collateral. Both types of transaction should be properly documented and expert opinion should be sought to reduce the risks for both parties.