ESMA postpones buy-in regime to 2025
30 august 2022
After a much anticipated announcement by the European Securities and Markets Authority, industry participants reflect on a three-year delay to the implementation of the CSDR mandatory buy-in regime. Carmella Haswell reports
Image: stock.adobe.com/kittitee550
The European Securities and Markets Authority (ESMA) has postponed the application of the Central Securities Depository Regulation (CSDR) mandatory buy-in regime for a further three years. Market participants have conveyed concerns over “serious difficulties” to implement the mandatory buy-in regime on the scheduled date — which has been postponed on several occasions since 13 September 2020.
These difficulties referred to “the absence of clarity regarding some open questions necessary for the implementation of the buy-in requirements”. This is in addition to “the uncertainty as to whether the European Commission’s legislative proposals on amending regulation of the European Parliament and of the Council would include amendments to the mandatory buy-in rules and the extent of any potential amendments.”
Speaking to SFT on the recent news, Karan Kapoor, head of regulatory change and technology at Delta Capita, says: “The securities finance and lending industry was going to feel a significant impact of the buy-in regime, should it have gone ahead as planned — given there are numerous instances where lenders and borrowers would find themselves foul of the CSDR timelines, due to no fault of theirs, resulting in a chain reaction of ‘onward’ buy ins.”
In July 2021, the Joint Trade Associations — a group of 16 industry bodies — wrote to the European Commission (EC) and ESMA advising against the introduction of the proposed mandatory buy-in component of the CSDR settlement discipline rules and encouraged amendments to the mandatory buy-in component. The letter followed on from earlier recommendations by the Joint Associations on the CSDR settlement discipline regime in letters addressed to both the EC and ESMA on 22 January 2020 and 11 March 2021.
The much anticipated delay of the buy-in rules — which refer to a mandatory obligation for trading parties to execute buy-ins against counterparties who fail to settle their trades within a required period — has been welcomed by a number of market participants.
Paul Baybutt, director for middle office product, securities services, at HSBC, comments: “The industry has welcomed the decision by ESMA as it is seen to provide sufficient time for the legislators to determine how best to improve settlement efficiency without having a detrimental impact on the market. It also provides time to measure how effective other aspects of the Settlement Discipline Regime are — including penalties — at improving settlement efficiency without mandatory buy-ins.”
Also in favour of the announcement, Delta Capita’s Kapoor suggests that the move will allow participants additional time to test out their newly implemented processes in a live environment, ensure that all controls are acting according to expectations, and put in place remediations where necessary.
He adds: “The firms that have been disadvantaged in this process are organisations that were standing up ‘buy-in agent’ services – but for the rest of the industry this has been a positive outcome.”
Mandatory buy-ins had previously been scheduled for implementation when the settlement discipline regime went live on 1 February 2022, but instead European policymakers took the decision to postpone the mandatory buy-in element for further consideration. The legislation enacted in February requires impacted European CSDs to automatically apply financial penalties to market participants that fail to complete transactions on the contractual settlement date and subsequently report those failed trades.
Redirecting attention
After a long period of ambiguity, the delay has continued to steal energy and focus in forums and market conversations. According to AccessFintech’s head of financial products Pardeep Cassells, the industry is now able to free up resources to redirect attention to the current penalty regime, implement it fully and work to drive down fails.
Similarly, Daniel Carpenter, CEO of Cognizant company Meritsoft, says the postponement will allow for planned resources to be allocated to ensuring automation of penalties handling, processing the increasing partial settlements needs, and performing daily and monthly reconciliations.
Carpenter continues: “In conjunction, firms can work towards digitising and centralising their settlement fails data, which can be utilised for predictive analytics purposes, leveraging artificial intelligence and machine learning. All of the above will give market participants a strong footing from which to tackle the buy-in rules, should they ultimately be introduced.”
Despite the additional three years for the securities finance industry to ready themselves for the possible change, Camille McKelvey, head of post trade STP business at MarketAxess, advises market participants must use this extra time wisely.
A step in the right direction would be to work towards improving settlement rates across securities, says McKelvey. “Next-day or T+1 settlement of fixed income trades “might seem a pipe dream”, but there are few insurmountable operational or technology reasons why such a move cannot happen – this is already happening in the US, and I predict it will likely follow in Europe.”
Although post-trade automation adoption is improving, McKelvey believes there is still a long way to go before 100 per cent post-trade straight-through-processing (STP) is achieved. Furthermore, she suggests that if this is achieved and this has a positive impact on settlement rates, this could mean that mandatory buy-ins will not be on the regulators’ radar.
“When operational efficiencies and financial stability are at stake, the industry’s resolve and propensity to change should not be underestimated – there are now three years to make a positive change, we must not waste them,” says McKelvey.
A final report by ESMA has seen amendments to the regulatory technical standards (RTS) on settlement discipline, based on the expected changes to the CSDR buy-in regime presented in the commission’s legislative proposal for the CSDR Review and amendments to the Distributed Ledger Technology Pilot Regulation.
This draft RTS has been sent to the EC for endorsement in the form of a Commission Delegated Regulation. Following the endorsement by the EC, the Commission Delegated Regulation will then be subject to the non-objection of the European Parliament and of the Council.
Analysing the impact the delay will have on the industry, AccessFintech’s Cassells explains: “It was widely anticipated that stock lending volumes would increase significantly under a mandatory buy-in regime, where borrows to cover would have grown to minimise execution of mandatory buy-ins.
“However, given the huge value of penalties that we are seeing across the market — with AccessFintech having seen €77 million in the first two months since the regulation went live — I expect we will see activity pick up for lending agents as organisations look for ways to minimise penalties against longer-standing fails.”
These difficulties referred to “the absence of clarity regarding some open questions necessary for the implementation of the buy-in requirements”. This is in addition to “the uncertainty as to whether the European Commission’s legislative proposals on amending regulation of the European Parliament and of the Council would include amendments to the mandatory buy-in rules and the extent of any potential amendments.”
Speaking to SFT on the recent news, Karan Kapoor, head of regulatory change and technology at Delta Capita, says: “The securities finance and lending industry was going to feel a significant impact of the buy-in regime, should it have gone ahead as planned — given there are numerous instances where lenders and borrowers would find themselves foul of the CSDR timelines, due to no fault of theirs, resulting in a chain reaction of ‘onward’ buy ins.”
In July 2021, the Joint Trade Associations — a group of 16 industry bodies — wrote to the European Commission (EC) and ESMA advising against the introduction of the proposed mandatory buy-in component of the CSDR settlement discipline rules and encouraged amendments to the mandatory buy-in component. The letter followed on from earlier recommendations by the Joint Associations on the CSDR settlement discipline regime in letters addressed to both the EC and ESMA on 22 January 2020 and 11 March 2021.
The much anticipated delay of the buy-in rules — which refer to a mandatory obligation for trading parties to execute buy-ins against counterparties who fail to settle their trades within a required period — has been welcomed by a number of market participants.
Paul Baybutt, director for middle office product, securities services, at HSBC, comments: “The industry has welcomed the decision by ESMA as it is seen to provide sufficient time for the legislators to determine how best to improve settlement efficiency without having a detrimental impact on the market. It also provides time to measure how effective other aspects of the Settlement Discipline Regime are — including penalties — at improving settlement efficiency without mandatory buy-ins.”
Also in favour of the announcement, Delta Capita’s Kapoor suggests that the move will allow participants additional time to test out their newly implemented processes in a live environment, ensure that all controls are acting according to expectations, and put in place remediations where necessary.
He adds: “The firms that have been disadvantaged in this process are organisations that were standing up ‘buy-in agent’ services – but for the rest of the industry this has been a positive outcome.”
Mandatory buy-ins had previously been scheduled for implementation when the settlement discipline regime went live on 1 February 2022, but instead European policymakers took the decision to postpone the mandatory buy-in element for further consideration. The legislation enacted in February requires impacted European CSDs to automatically apply financial penalties to market participants that fail to complete transactions on the contractual settlement date and subsequently report those failed trades.
Redirecting attention
After a long period of ambiguity, the delay has continued to steal energy and focus in forums and market conversations. According to AccessFintech’s head of financial products Pardeep Cassells, the industry is now able to free up resources to redirect attention to the current penalty regime, implement it fully and work to drive down fails.
Similarly, Daniel Carpenter, CEO of Cognizant company Meritsoft, says the postponement will allow for planned resources to be allocated to ensuring automation of penalties handling, processing the increasing partial settlements needs, and performing daily and monthly reconciliations.
Carpenter continues: “In conjunction, firms can work towards digitising and centralising their settlement fails data, which can be utilised for predictive analytics purposes, leveraging artificial intelligence and machine learning. All of the above will give market participants a strong footing from which to tackle the buy-in rules, should they ultimately be introduced.”
Despite the additional three years for the securities finance industry to ready themselves for the possible change, Camille McKelvey, head of post trade STP business at MarketAxess, advises market participants must use this extra time wisely.
A step in the right direction would be to work towards improving settlement rates across securities, says McKelvey. “Next-day or T+1 settlement of fixed income trades “might seem a pipe dream”, but there are few insurmountable operational or technology reasons why such a move cannot happen – this is already happening in the US, and I predict it will likely follow in Europe.”
Although post-trade automation adoption is improving, McKelvey believes there is still a long way to go before 100 per cent post-trade straight-through-processing (STP) is achieved. Furthermore, she suggests that if this is achieved and this has a positive impact on settlement rates, this could mean that mandatory buy-ins will not be on the regulators’ radar.
“When operational efficiencies and financial stability are at stake, the industry’s resolve and propensity to change should not be underestimated – there are now three years to make a positive change, we must not waste them,” says McKelvey.
A final report by ESMA has seen amendments to the regulatory technical standards (RTS) on settlement discipline, based on the expected changes to the CSDR buy-in regime presented in the commission’s legislative proposal for the CSDR Review and amendments to the Distributed Ledger Technology Pilot Regulation.
This draft RTS has been sent to the EC for endorsement in the form of a Commission Delegated Regulation. Following the endorsement by the EC, the Commission Delegated Regulation will then be subject to the non-objection of the European Parliament and of the Council.
Analysing the impact the delay will have on the industry, AccessFintech’s Cassells explains: “It was widely anticipated that stock lending volumes would increase significantly under a mandatory buy-in regime, where borrows to cover would have grown to minimise execution of mandatory buy-ins.
“However, given the huge value of penalties that we are seeing across the market — with AccessFintech having seen €77 million in the first two months since the regulation went live — I expect we will see activity pick up for lending agents as organisations look for ways to minimise penalties against longer-standing fails.”
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