Buy-In Procedure

A buy-in procedure is the remedy used in securities markets when a seller fails to deliver securities by the agreed settlement date. After a set period, the buyer, or a central counterparty or agent acting for it, buys the same securities from another source and delivers them, and the failing seller pays the difference between the buy-in price and the original trade price, plus costs. If the securities cannot be found, the trade may instead be settled with a cash compensation payment.

Buy-ins are part of settlement discipline, the rules that encourage trades to settle on time. They sit alongside cash penalties for late settlement and the close-out requirements that apply to short sellers. Rules come from regulation, such as the EU Central Securities Depositories Regulation (CSDR), from clearing house rulebooks and from market associations, such as the International Capital Market Association for bonds.

Imagine ordering concert tickets from a reseller who never sends them. The day before the show, you buy replacement tickets from someone else, perhaps at a higher price. You then ask the first reseller to pay you the extra you had to spend, since it was their failure that forced you to pay more.

A buy-in does the same for shares and bonds. When a seller does not deliver on time, the buyer gets the securities elsewhere and sends the bill for any extra cost to the seller. The threat of a buy-in pushes sellers to deliver on time, or to borrow the securities if they do not have them.

1. The trade fails to settle on its intended settlement date because the seller has not delivered the securities.
2. An extension or grace period runs, during which the seller can still deliver.
3. If the fail continues, the buyer or its agent issues a buy-in notice and appoints a buy-in agent to purchase the securities in the market.
4. The buy-in agent buys and delivers the securities, and the original trade is closed out.
5. The difference between the buy-in price and the original price, plus costs, is paid by the failing party; if no buy-in is possible, cash compensation is calculated against a reference price.

The payment owed by the failing seller can be expressed as:

where $P_{\text{buy-in}}$ is the price paid in the buy-in, $P_{\text{trade}}$ is the original trade price and $Q$ is the quantity. If a buyer agreed to buy 10,000 bonds at 98.00 and the buy-in executes at 99.50, the differential is (99.50 − 98.00) ÷ 100 × 10,000 × 1,000 face value per bond = $150,000, charged to the seller. Rules differ on what happens if the buy-in price is lower than the trade price, and whether that difference is paid back to the seller.

The CSDR, Regulation (EU) No 909/2014, introduced a settlement discipline regime that applied from February 2022. Daily cash penalties on failed settlement instructions came into force, but the mandatory buy-in rules were postponed after industry warnings that they would harm liquidity, particularly in bond markets. The 2023 review of CSDR, Regulation (EU) 2023/2845, kept penalties and made mandatory buy-ins a measure of last resort: they would apply only if the European Commission decided, after other measures, that settlement efficiency had not improved enough, and then only for selected instruments or transactions. The EU is also preparing to move securities settlement to a T+1 cycle, which makes timely delivery more pressing. The United Kingdom chose not to implement the CSDR settlement discipline regime.

In the United States, failures to deliver in equities are mainly addressed by the close-out requirement in Rule 204 of Regulation SHO, which requires brokers to close out fails by purchasing or borrowing securities within set deadlines, especially where short selling is involved. The clearing house for equities, which nets trades through continuous net settlement, has its own buy-in process for each clearing member, and FINRA rules provide buy-in procedures for trades settled outside it. In the international bond market, the ICMA rules give buyers a contractual right to buy in and set out notices, timing and the treatment of price differences.

Buy-ins protect buyers and reinforce the principle of delivery versus payment, but they can be costly and disruptive. A mandatory regime may force sellers, including market makers, to widen prices or avoid trading less liquid securities, and buy-ins in thinly traded issues can push prices sharply. Fails often arise from operational problems or chains of linked trades rather than deliberate non-delivery, so firms focus on preventing them through better confirmation matching, inventory management, use of borrowing and repo, and timely securities lending recalls. Central securities depositories and clearing houses monitor fail rates and publish settlement efficiency data.