ICMA: complications and ambiguities of CSDR
04 October 2018 Zurich
Image: Shutterstock
The International Capital Market Association (ICMA) has published a discussion paper on Central Securities Depositories Regulation (CSDR) mandatory buy-ins and securities financing transactions.
ICMA explained that the paper intends to complement its earlier work on the topic of CSDR Settlement Discipline, which is due to come into force in September 2020.
In June this year, it published the discussion paper, ‘How to survive in a mandatory buy-in world’, which sought to illustrate the adverse behavioural incentives arising from the design of the CSDR buy-in framework.
ICMA said this latest paper focuses more specifically on the implementation challenges for in-scope repo and securities lending markets.
Currently, securities finance transactions (SFTs) have their own contractual provisions in the event of a settlement fail, laid out in the relevant contract agreements.
Buy-ins, as utilised in the outright cash markets, generally do not apply to SFTs.
However, under the new regulation, SFTs with terms of 30 business days or longer will be in the scope of the mandatory buy-in provisions.
This creates a number of complications and ambiguities which the paper seeks to explore and discuss, said ICMA.
In doing so, it also intends to lay the groundwork for constructive dialogue between market participants and the regulatory authorities to resolve the various challenges and support successful implementation, with minimal disruption to market functioning and liquidity.
“There is still time for regulators and policymakers to reconsider both its design and application,” said ICMA in its conclusion to its latest paper.
While CSDR deals mainly with the regulation of Europe’s settlement systems, it contains a section on settlement discipline, which includes measures to improve settlement efficiency, such as cash penalties for fails. Among these is the provision for mandatory buy-ins.
ICMA commented that it has long supported and argued for measures to improve settlement efficiency in the European fixed income and collateral markets.
Notwithstanding this, ICMA said it has also long argued against the implementation of a mandatory buy-in regime in the non-cleared bond markets.
The association has also raised concerns with the regulatory authorities with respect to the potential negative impacts it will have on market liquidity and stability.
ICMA said it will continue to work to raise awareness of the likely unintended consequences of the regulation and question the need for a mandatory buy-in regime. It added that it is also working hard on ensuring the smooth implementation of the regulation.
As well as raising market awareness of the regulatory requirements, it is looking to establish market standards and processes, primarily through its well established and widely utilised buy-in rules, to support implementation, while also attempting to address some of the regulation’s more challenging provisions.
A day earlier, Andy Hill, the author of the paper, hosted a webinar in which he presented an overview of the CSDR mandatory buy-in provisions and contrasted these with more conventional processes.
The session also explored the likely implications for market risk and potential adverse behavioural incentives for European bond and repo market participants.
ICMA explained that the paper intends to complement its earlier work on the topic of CSDR Settlement Discipline, which is due to come into force in September 2020.
In June this year, it published the discussion paper, ‘How to survive in a mandatory buy-in world’, which sought to illustrate the adverse behavioural incentives arising from the design of the CSDR buy-in framework.
ICMA said this latest paper focuses more specifically on the implementation challenges for in-scope repo and securities lending markets.
Currently, securities finance transactions (SFTs) have their own contractual provisions in the event of a settlement fail, laid out in the relevant contract agreements.
Buy-ins, as utilised in the outright cash markets, generally do not apply to SFTs.
However, under the new regulation, SFTs with terms of 30 business days or longer will be in the scope of the mandatory buy-in provisions.
This creates a number of complications and ambiguities which the paper seeks to explore and discuss, said ICMA.
In doing so, it also intends to lay the groundwork for constructive dialogue between market participants and the regulatory authorities to resolve the various challenges and support successful implementation, with minimal disruption to market functioning and liquidity.
“There is still time for regulators and policymakers to reconsider both its design and application,” said ICMA in its conclusion to its latest paper.
While CSDR deals mainly with the regulation of Europe’s settlement systems, it contains a section on settlement discipline, which includes measures to improve settlement efficiency, such as cash penalties for fails. Among these is the provision for mandatory buy-ins.
ICMA commented that it has long supported and argued for measures to improve settlement efficiency in the European fixed income and collateral markets.
Notwithstanding this, ICMA said it has also long argued against the implementation of a mandatory buy-in regime in the non-cleared bond markets.
The association has also raised concerns with the regulatory authorities with respect to the potential negative impacts it will have on market liquidity and stability.
ICMA said it will continue to work to raise awareness of the likely unintended consequences of the regulation and question the need for a mandatory buy-in regime. It added that it is also working hard on ensuring the smooth implementation of the regulation.
As well as raising market awareness of the regulatory requirements, it is looking to establish market standards and processes, primarily through its well established and widely utilised buy-in rules, to support implementation, while also attempting to address some of the regulation’s more challenging provisions.
A day earlier, Andy Hill, the author of the paper, hosted a webinar in which he presented an overview of the CSDR mandatory buy-in provisions and contrasted these with more conventional processes.
The session also explored the likely implications for market risk and potential adverse behavioural incentives for European bond and repo market participants.
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