CSDR will harm those it seeks to protect, says ICMA
03 February 2020 London
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The International Capital Market Association (ICMA) and the Investment Association have reinforced calls for a delay and reforms to the Central Securities Depositories Regulation’s (CSDR) mandatory buy-in provisions.
CSDR’s buy-in provisions are officially slated to come into force in September but are understood to facing a push-back until early 2021. The delay is in response to
widespread concern from several market sectors that its settlement discipline regime, which includes the mandatory buy-in provisions, are not fit-for-purpose.
In a letter to the European Commission, the associations warn of the potentially negative consequences for the EU’s bond market and specifically for their buy-side members, which CSDR was aimed at protecting.
“Our respective members wish to make clear that they are fully supportive of all constructive efforts, whether private or public, to improve settlement efficiency in the European Union,” the letter reads.
“This includes the use of buy-in and sell-out provisions, which are an important contractual remedy for settlement fails and a useful tool for managing settlement risk,” it continues. “Nevertheless, our members are concerned that the buy-in provisions specified in the CSDR, while well-intentioned, will prove to be unduly harmful to the functioning, liquidity, and stability of the EU’s bond markets.”
The associations further note that CSDR’s buy-in rules “differ legally, structurally, and economically from existing contractual buy-in remedies used in the non-cleared bond markets,” which they say “undermines the effectiveness of EU CSDR mandatory buy-ins as a bond market settlement risk mitigant”.
The provisions are widely expected to increase market risks markedly, both for liquidity providers and investors, the letter says. In turn, this could have unintentional detrimental consequences for issuers raising capital in the EU’s bond markets.
As a result, the associations are requesting reforms to CSDR’s regulatory technical standards “to allow for a more market-sensitive and phased application of the requirements, based on a thorough evaluation of market impacts”.
The concerns raised in the letter echo requests made in a previous letter signed by 14 trade bodies, including ICMA and the International Securities Lending Association, that was sent by the Association for Financial Markets in Europe (AFME), to the Commission on 22 January.
CSDR’s buy-in provisions are officially slated to come into force in September but are understood to facing a push-back until early 2021. The delay is in response to
widespread concern from several market sectors that its settlement discipline regime, which includes the mandatory buy-in provisions, are not fit-for-purpose.
In a letter to the European Commission, the associations warn of the potentially negative consequences for the EU’s bond market and specifically for their buy-side members, which CSDR was aimed at protecting.
“Our respective members wish to make clear that they are fully supportive of all constructive efforts, whether private or public, to improve settlement efficiency in the European Union,” the letter reads.
“This includes the use of buy-in and sell-out provisions, which are an important contractual remedy for settlement fails and a useful tool for managing settlement risk,” it continues. “Nevertheless, our members are concerned that the buy-in provisions specified in the CSDR, while well-intentioned, will prove to be unduly harmful to the functioning, liquidity, and stability of the EU’s bond markets.”
The associations further note that CSDR’s buy-in rules “differ legally, structurally, and economically from existing contractual buy-in remedies used in the non-cleared bond markets,” which they say “undermines the effectiveness of EU CSDR mandatory buy-ins as a bond market settlement risk mitigant”.
The provisions are widely expected to increase market risks markedly, both for liquidity providers and investors, the letter says. In turn, this could have unintentional detrimental consequences for issuers raising capital in the EU’s bond markets.
As a result, the associations are requesting reforms to CSDR’s regulatory technical standards “to allow for a more market-sensitive and phased application of the requirements, based on a thorough evaluation of market impacts”.
The concerns raised in the letter echo requests made in a previous letter signed by 14 trade bodies, including ICMA and the International Securities Lending Association, that was sent by the Association for Financial Markets in Europe (AFME), to the Commission on 22 January.
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