The European Commission has postponed the implementation of Central Securities Depositories Regulation (CSDR) mandatory buy-in provisions following months of speculation, as well as industry requests for the execution date of 1 February 2022 to be pushed back.
The mandatory buy-in provision creates a mandatory obligation for trading parties to execute buy-ins against counterparties who fail to settle their trades within a required period.
Over the course of the year, arguments for delay of the buy-in rules have been strongly voiced by the industry, along with some suggestion that the rules should even be made voluntary.
In recent months it has widely been assumed that the postponement would be announced some time this month. This was even hinted at by the European Commission directly, in a Fireside Chat with Jennifer Robertson, acting head of unit for the commission.
At the Association for Financial Markets in Europe (AFME) 14th Annual European Post Trade Virtual Conference last month, Robertson, signaled: “With a legislative proposal currently planned for January, it does not take a great deal of calculation to work out that the idea of the European Commission adopting and negotiating with subsequent publication of any CSDR review is unlikely before 1 February 2022.”
Calls for the mandatory buy-in provisions to be delayed increased during the COVID-19 pandemic, due to a wide concern that the introduction of the buy-in element of the settlement discipline regime (SDR) under CSDR would “present a significant risk to Europe’s recovery from the COVID-19 crisis and will likely disproportionately impact on small and medium-sized enterprises and less liquid securities”, an opinion put forward by AFME back in February 2021.
AFME was also among the associations calling for the buy-in rule to be a discretionary right of the receiving party, not a mandatory obligation. AFME says it supports a phased approach, and that revised buy-in rules should be deferred to a later date.
In January 2020 and March 2021, an alliance of 14 trade bodies called for a CSDR buy-in delay, this included International Capital Markets Association (ICMA), the International Securities Lending Association (ISLA), AFME, the International Swaps and Derivatives Association and the European Fund and Asset Management Association.
On 30 June 2021, the European Commission released an interim report on the CSDR settlement discipline regime to the European Parliament and European Council. This follows a targeted consultation process which ran from 8 December 2020 to 1 February 2021.
In July 2021, the Joint Trade Associations again wrote to the European Commission and ESMA regarding the implementation schedule for mandatory buy-in rules.
ISLA’s Adrian Dale, head of regulation and market practice, outlined that the one-size-fits-all buy-in proposal “could be severely damaging to market liquidity”, if applied to securities financing transactions, adding that securities lending, in particular, “contributes to reducing settlement fails by offering an alternative avenue for accessing securities when traditional routes breakdown.
Earlier this year, the ICMA said that mandating buy-ins will have “adverse impacts on European bond market efficiency and liquidity”, noting that a “significant body of evidence suggests it will ultimately lead to increased costs for market participants and particularly end investors”.
While the deadline of February 2022 was fast approaching, the European Securities and Markets Authority also recommended a delay in buy-in rules to the European Commission as recently as September.
ESMA was in favour of delaying the entry into force of the buy-in requirements, although it advised that other settlement discipline requirements, such as settlement fails reporting and cash penalties regime, could be enacted on the 1 February deadline as planned.
Commenting today on the news of the postponement, ISLA's Dale says: “ISLA welcomes the recent agreement by EU legislators that there should be a decoupling of the mandatory buy-ins and settlement penalties within the CSDR. Our market has been exploring the far-reaching impact of mandatory buy-ins, which would have had both a disproportionate and negative impact in their current form."
The penalties legislation will, by itself, accomplish much that this aspect of the regulation intended, and we look forward to seeing a positive trajectory of settlement rates and market disciplines over the course of the coming year. We are also mindful of the remaining challenges and clarifications that are required to complete this part of the journey."
Robert Keane, product manager and Matthew Lilien, business development manager at Pirum (US): “The postponement of mandatory buy-ins is welcome news for the entire market and allows participants to focus on reducing the impact of cash penalties that will be implemented in February.”
However, Daniel Carpenter, head of regulation at Meritsoft, a Cognizant company, says despite the postponement of the mandatory buy-in rules, “the clock is still ticking and businesses must be prepared to comply with the penalty rules when they come into force in February 2022. Time will tell how far a ‘penalties-only’ CSDR will go in addressing the industry-wide issue of settlement fails, but the additional cost implications are certainly focusing minds on more effective fails prevention and management.”
“So while many across the industry will welcome the Commission’s decision on buy-ins, preparation must continue at pace if firms are to meet the other requirements of the new rules when they come into force in February", Carpenter adds.
Also outlining the hurdles that the regulation still highlights for the financial market, Pardeep Cassell, head of financial products at AccessFintech, comments: "Whilst this change does remove part of the complexity and punitive impact of CSDR, which is positive, it also leaves the door open for longer-running fails, increased penalty amounts, and potentially fewer organisations agreeing to accept partial settlement than we may have seen under the previous iteration. We continue to encourage all market participants to ensure they have a robust pre-matching and settlement process and an efficient mechanism to consume, track and manage penalties and penalty messages."
