The Central Securities Depositories Regulation’s (CSDR) mandatory buy-in regime would have caused “catastrophic” market upheaval if it had been in place during the COVID-19 disruption seen in Q1, says ICMA.
The International Capital Market Association (ICMA) is highlighting the period of volatility seen in February and March as new evidence to reinforce its claims that CSDR’s settlement discipline regime will not only fail to reduce market risk but will, in fact, bring new instability.
ICMA expressed its concerns by penning a fresh letter to the European Commission and the European Securities and Markets Authority, this time addressing its regulatory chiefs, to express its members’ “increasing concerns” about the fast-approaching regulation.
As well as reiterating previously-stated concerns around lingering ambiguities and particularly around the unsuitability of a mandatory buy-in rule, the trade body further argues that the market turmoil seen in Q1 provides a stark example of why such rules would do more harm than good.
Andrew Hill, senior director for market practice and regulatory policy at ICMA, tells SLT that there are several ways the mandatory buy-in regime would have been “catastrophic” had it been in place in recent months. This includes the fact buy-ins are massively resource-draining, demand the purchase of illiquid assets at any price, and would have pushed players out the market at the exact moment they were needed most.
In its latest letter, sent last week, ICMA notes in the final weeks of Q1, European credit secondary markets came under significant pressure as the market repriced risk and as fund managers responded to sizeable outflows.
At the same time, operational infrastructure was stress-tested to its limits, as firms adjusted to working remotely against a backdrop of significantly increased volumes needing to be processed.
Two main factors allowed the market to continue to function through this disruption, ICMA explains.
“Firstly, the ability and willingness of broker-dealers to continue to make markets for their clients, and secondly a market-wide tolerance of settlement fails (which increased significantly in absolute terms),” it states.
ICMA further argues that, given that a mandatory buy-in regime is designed to make settlement fails economically unviable, and will restrict market-making capacity, it is worth considering how this regime would have impacted the market’s ability to function during this crisis and the extent to which it would have added to systemic market risks and instability, thereby further amplifying the already extreme dislocations.
For more than a year, the trade body has repeatedly laid out the concerns of its members and the market at large related to the lingering ambiguities of the regulation and particularly around the unsuitability of a mandatory buy-in rule, but these have largely fallen on deaf ears in Brussels and Paris.
In drawing attention to the novel coronavirus' effect on markets, ICMA is echoing concerns raised by the CEO of the International Securities Lending Association, who noted in April that the period of volatility had exposed certain regulations, including CSDR, that need to be reviewed.
In sending its latest letter, ICMA is
fulfilling its promise to shrug-off the latest dismissals of its warnings by ESMA’s chair, Steven Maijoor, and has stated that it has a duty to shield its member base, but particularly its buy-side members, from CSRD’s mandatory buy-in regime.
Last month, Maijoor replied to a letter sent by several associations, including ICMA, which laid out the market’s concerns to the regulator, by stating that he approved of the delay for implementation until February but no changes would be made to the rules before go-live.
In closing, ICMA explains that it and its members “remain fully committed to the implementation and objectives of the CSDR settlement discipline measures, and will continue to support initiatives, both regulatory and market-based, to improve settlement efficiency in the EU securities markets”.
