Buy-in

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Buy-in
/baɪ ɪn/ (n.)

A self-help remedy in the securities markets where a market counterparty is unable to perform its obligations to deliver securities under an existing transaction, such as a securities sale or a stock loan. Since the selliung counterparty is failing to pony up what it owes — and by the way this may not be the counterparty’s fault: it may be the wrong end of an upstream fail, or there may be a general market dislocation — the buyer takes matters into its own hands and “buys in” from another source to satisfy its own requirements.

This has two consequences: firstly — assuming the buy in settles — the buyer no-longer needs the securities it originally bought from the failing seller. So the failing seller is stuck with these. Secondly, the price at which the buyer executes the buy-in transaction will almost certainly differ from price agreed for the original failed trade. The buyer can pass its loss on to the failing seller.

Likely points for dispute, not really well managed by the legal documentation, but left down to the commercial expedient of getting on the phone and sorting it out as a way of managing the ongoing relationship — any single buy-in opportunity more than likely to be drowned out by the normal revenue one can expect to make from an ongoing fruitful relationship with a counterparty one hasn't needlessly cheesed off — include (i) a Buy-in happening too quickly — as per the CDSR conventions, it is normal to wait 4 or 5 buisness days to let normal wrinkles in the settlement chain sort themselves out — and a buy-in happening at an off-market price: Since the Non-Defaulting Party can pass on its costs of buying in, it is less incentivised than it normally is to get the best possible price, and in a market which is Q.E.D. already sticky — otherwise, why the need for a buy in? — it is likely there will be some shoddy prices going.

Happened quiet a lot, for example, during the early months of the Russian crisis.

Central Securities Depositary Regulation mandatory buy-ins

Under the CSDR a mandatory buy-in process starts automatically 4 business days after the originally intended settlement date (for liquid equities) and 7 business days for other equity and debt securities. Where a buy-in isn’t possible, there is a cash compensation.

See also

• Securities financing transaction
• Buy-in under the 2010 GMSLA
• Buy-in under the Global Master Repurchase Agreement