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8. What is the difference between a repurchase agreement and a sell/buy-back?
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Repurchase agreements and sell/buy-backs both function (outside the US --- see question 9) by means of the legal sale of collateral but behave economically like secured loans/deposits (see question 1). The principal difference between these two types of repo stems from the fact that a repurchase agreement is always evidenced by a written contract, whereas a sell/buy-back may or may not be documented. Because repurchase agreements and documented sell/buy-backs have written contracts, they are legally more robust and commercially more flexible than undocumented sell/buy-backs.

Because an undocumented sell/buy-back is not documented, its sale and repurchase legs are considered to be separate contracts. The lack of a contract between the parties to an undocumented sell/buy-back, other than on the first and last day of the transaction, means that it is not possible for one party to make a legally-enforceable margin call on the other in order to eliminate differences that might open up between the values of the cash and the collateral during the life of the repo. In addition, because they are undocumented, the right to net mutual obligations following a counterparty default is less certain. These deficiencies make undocumented sell/buy-backs riskier.

There are some other (operational) differences between repurchase agreements and sell/buy-backs, eg the way that margining is performed in repurchase agreements compared with the equivalent process in documented sell/buy-backs, and what happens when a coupon, dividend or other income payment is paid on collateral in repurchase agreements compared with either documented or undocumented sell/buy-backs.

Some markets predominantly use repurchase agreements (eg US, UK, France, Belgium, Netherlands and Switzerland). Other markets predominantly or even exclusively use sell/buy-backs (eg Italy, Spain and most emerging markets), usually because aspects of repurchase agreements such as margining can pose legal difficulties in those jurisdictions.


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