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Originally designed to overcome currency restrictions, the initial back-to-back borrowing and lending arrangements were offsetting loans between two parties in two different currencies. For example, a United States firm might make a dollar loan to a United Kingdom company in the U.S., and the U.K. company would make an equal value loan (at spot exchange rates) in sterling to the U.S. firm in the U.K. Each party gets the currency it needs without going through the exchange rate mechanism. This structure has been replaced by currency swaps in major markets, but it is still used where exchange restrictions apply. Back-to- back loans are also used in credit enhancement, with or without the dual currency feature.
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