ESMA gives buy-in exemption to certain SFTs
02 February 2016 Brussels
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Securities financing participants have successfully obtained an exemption from the mandatory buy-in regime of the Central Securities Depository Regulation (CDSR) for certain transactions.
The European Securities and Markets Authority (ESMA) released its final technical standards for settlement disciplines under the CSDR on 1 February, applying a mandatory buy-in exemption for transactions not exceeding 30 days.
ESMA was due to deliver the final technical standards in September, but the European agency delayed from doing so after securities financing participants raised concerns that the penalties imposed may be disruptive to normal market activity.
Buy-ins act as additional security for the buyer of securities in a trade. If the counterparty fails to deliver the securities agreed, the buyer has the right to appoint an agent to purchase the securities at market value for guaranteed delivery.
The buyer will still purchase the securities for the agreed price, and the seller must make up the difference.
This is conducted on a discretionary basis, and occurs fairly infrequently, but under the new CSDR rules, buy-ins will become mandatory if instruments are not delivered within a specified time frame.
ESMA initially held that whenever the intended settlement date of the second leg of the transaction was before or on the day when the timeframe for the delivery of the financial instruments would have elapsed, the buy-in addressing the fail of the first leg of the transaction would have been ineffective.
But during the consultation process on ESMA’s final technical standards, some securities financing participants argued that the proposed approach “would create very different demand and supply skews depending on the fixed terms of the transactions”.
According to ESMA: “They thought that lenders would no longer be incentivised to lend securities where there is even the remote possibility of being bought in and that intermediaries/repo desks would adjust their price for fixed terms that are in the scope of buy-in rules as in a low margin business, participants are extremely sensitive to any increase in their costs.”
“They also stressed the impact on Basel III net stable funding ratio, which seeks to reduce financial institutions reliance on short term sources of finance such as term repo.”
To overcome these issues, they suggested excluding all transactions with terms of 30 days or less, and all of those in bonds, from mandatory buy-ins, which ESMA has taken on board.
“Given that the settlement instruction does not contain information on whether it relates to the first or second leg of the securities financing transaction, in view of the difficulties to implement and enforce the rule as well as the estimated impacts of the previous proposal, ESMA has revised its approach.”
“Therefore, in consideration of the length of time of the extension period, the delivery period, the ability to defer the buy-in, ESMA proposes a global approach whereby buy-in would be ineffective for those securities financing transactions concluded for a maximum of 30 business days.”
On bonds, ESMA added: “ESMA’s mandate relates to the determination of the timeframe that renders buy in ineffective for certain types of transactions and ESMA has no mandate on the scope of application of the exemption related to the categories of financial instruments. As a result, ESMA cannot consider for the draft [technical standards] any provision aiming at excluding the securities financing transactions in bonds from the scope of the buy-in rules.”
The European Commission has three months to endorse the final technical standards, followed by a non-objection period of the European Parliament and Council. The rules will then enter into force two years after their publication in the Official Journal of the EU.
The European Securities and Markets Authority (ESMA) released its final technical standards for settlement disciplines under the CSDR on 1 February, applying a mandatory buy-in exemption for transactions not exceeding 30 days.
ESMA was due to deliver the final technical standards in September, but the European agency delayed from doing so after securities financing participants raised concerns that the penalties imposed may be disruptive to normal market activity.
Buy-ins act as additional security for the buyer of securities in a trade. If the counterparty fails to deliver the securities agreed, the buyer has the right to appoint an agent to purchase the securities at market value for guaranteed delivery.
The buyer will still purchase the securities for the agreed price, and the seller must make up the difference.
This is conducted on a discretionary basis, and occurs fairly infrequently, but under the new CSDR rules, buy-ins will become mandatory if instruments are not delivered within a specified time frame.
ESMA initially held that whenever the intended settlement date of the second leg of the transaction was before or on the day when the timeframe for the delivery of the financial instruments would have elapsed, the buy-in addressing the fail of the first leg of the transaction would have been ineffective.
But during the consultation process on ESMA’s final technical standards, some securities financing participants argued that the proposed approach “would create very different demand and supply skews depending on the fixed terms of the transactions”.
According to ESMA: “They thought that lenders would no longer be incentivised to lend securities where there is even the remote possibility of being bought in and that intermediaries/repo desks would adjust their price for fixed terms that are in the scope of buy-in rules as in a low margin business, participants are extremely sensitive to any increase in their costs.”
“They also stressed the impact on Basel III net stable funding ratio, which seeks to reduce financial institutions reliance on short term sources of finance such as term repo.”
To overcome these issues, they suggested excluding all transactions with terms of 30 days or less, and all of those in bonds, from mandatory buy-ins, which ESMA has taken on board.
“Given that the settlement instruction does not contain information on whether it relates to the first or second leg of the securities financing transaction, in view of the difficulties to implement and enforce the rule as well as the estimated impacts of the previous proposal, ESMA has revised its approach.”
“Therefore, in consideration of the length of time of the extension period, the delivery period, the ability to defer the buy-in, ESMA proposes a global approach whereby buy-in would be ineffective for those securities financing transactions concluded for a maximum of 30 business days.”
On bonds, ESMA added: “ESMA’s mandate relates to the determination of the timeframe that renders buy in ineffective for certain types of transactions and ESMA has no mandate on the scope of application of the exemption related to the categories of financial instruments. As a result, ESMA cannot consider for the draft [technical standards] any provision aiming at excluding the securities financing transactions in bonds from the scope of the buy-in rules.”
The European Commission has three months to endorse the final technical standards, followed by a non-objection period of the European Parliament and Council. The rules will then enter into force two years after their publication in the Official Journal of the EU.
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