Buy-side traders urge regulators to exclude cash bond market from CSDR buy-in regime

Trade associations have said cash bond markets should be excluded from initial rollout of the CSDR buy-in regime until the regulation’s impact on liquidity is fully assessed.

Two major buy-side trade bodies have urged regulatory authorities to exclude cash bond markets and phase in the implementation of the CSDR buy-in regime, amid growing concerns that the upcoming rules will have a detrimental impact on liquidity. 

The Investment Association (IA) and the International Capital Market Association’s (ICMA’s) Asset Management and Investors Council (AMIC) representing asset managers in Europe penned a letter to the European Commission requesting a different approach to introducing the requirements, specifically the controversial mandatory buy-in provision.

Both trade groups urged the European Commission to undertake a ‘robust market impact’ assessment of the buy-in regime before it is rolled out across Europe in early 2021, and in the absence of such an assessment, they have requested cash bond markets be excluded from the buy-in regime, to allow for close evaluation of the rule’s impact on liquidity and market pricing.

“Our members feel that such a cautious approach to phasing-in the mandatory buy-in requirements, based on the careful assessment of market impacts, will ultimately be in the best interests of investor protection, market stability, and the goals of the capital markets union,” said the IA and ICMA AMIC’s letter to the European Commission.

Initiating a buy-in against a failing counterparty will become a legal obligation under the Central Securities Depository Regulation (CSDR), with limited flexibility on timing to complete the process. This allows market participants to manage settlement risk in the case of failed trades, as the buyer goes to market to source the securities from another party. The payment of the difference between the buy-in price or cash compensation must also be made by the failing trading entity. Buy-ins have typically been used with discretion as they can create unpredictable costs.

ICMA and the IA, alongside various other buy- and sell-side trade associations, have been vocal in their concerns about the buy-in regime, specifically the potentially ‘devastating’ impact on bond market liquidity and increased costs of trading.

“Liquidity is already very challenging and getting even more so,” ICMA said, summarising buy-side comments on the regime as part of a study in November. “This regulation, in its current form, is likely to mean that banks will not short bonds. This would have a devastating impact on market liquidity, function and asset managers’ ability to service their clients effectively. It is worrying that many in a front-office, markets-facing position know nothing or very little about this impending regulation.”

Earlier this month, multiple trade groups, including the IA and ICMA, also wrote to the European Securities and Markets Authority (ESMA) calling for a delay to the mandatory buy-in regime until its effects are understood more clearly. They suggested replacing the mandatory nature of the buy-in with an optional right of the receiving party to pursue a buy-in in the event of a non-delivering counterparty.