CSDR: An industry united, a regulation divided

It has been a bumpy road on the journey to implementing CSDR in Europe, but with communication from legislators over the delayed introduction of mandatory buy-ins, it’s time to assess where we stand.

And so, we finally have clarity on the Settlement Discipline Regime (SDR) in Europe. The three aspects of the regulation under the Central Securities Depositories Regulation (CSDR) – mandatory buy-ins, penalties, and failed trades reporting – will be implemented at different times in the coming years.

Penalties for failed trades and subsequent reporting of those will come into force on 1 February 2022, while mandatory buy-ins (MBIs) will be delayed, potentially for two-to-three years.

This fragmented rollout is the product of what market participants called “flawed and disproportionate” buy-in rules, as many opined that common sense had prevailed when European legislators moved to delay their introduction.

Seldom have such strong arguments been thrown in the direction of regulators against the introduction of new rules with such frequency and ferocity. For the EU Commissioner and European Securities and Markets Authority (ESMA) chair, the letters from over a dozen organisations have been flooding in for years now, and with much more regularity over the past 12 months.

As February 2022 drew closer, these associations and the voices of securities services providers grew louder and really piled the pressure on ESMA and, in turn, the European Commission, Parliament and Council to – in lieu of reforming or scrapping the buy-in rules altogether – delay its implementation.

Though some still believe the notion of mandatory buy-ins is farcical, the delay marks a win for the securities industry, which will likely now continue to work on scaling back or at least gaining more clarity on the rules that would lead to increased costs, reduced liquidity and reduced investment returns for investors. 

“Mandatory buy-ins under CSDR had the real potential to impact market liquidity, especially in stressed circumstances, and the ability for the market to trade in European securities at attractive rates,” said Alex Dockx, executive director at JP Morgan’s Securities Services

“It would also create a huge burden for investors to enforce buy-ins, and would have required a major repapering of contracts for the industry. JP Morgan very much welcomes the decision to decouple buy-ins and review the regime. This is a very positive development for European financial markets.”

The topic has brought the industry together. Various individuals have commended the work of trade bodies and their members, including the Association of Financial Markets in Europe (AFME), The International Capital Market Association (ICMA), the International Securities Lending Association (ISLA) and the Investment Company Institute (ICI), among others. In fact, some see this united front as one of the most impressive feats of industry lobbying for some time.

It is important to remember just how long this has rumbled on for, and how momentous the delay announcement actually is. For example, ICMA first published an impact study of mandatory buy-ins for bond market pricing and liquidity in 2015, which first drew attention to the risks embedded in the regulation. Its 2017 position paper then supported the implementation of CSDR’s Settlement Discipline but recommended that MBIs not be implemented.

“Market participants will be awaiting further clarity from European authorities on the implementation of settlement discipline measures in February 2022 following today’s announcement,” said Pablo Portugal, managing director of advocacy at AFME. “The planned review of the CSDR in 2022 should fundamentally reconsider mandatory buy-ins and lead to a more proportionate regime that supports Europe’s capital markets.”

The delay for buy-ins has come through the DLT Pilot Regime legislative framework. As for next steps, once the DLT Pilot Regime is published in the Official Journal of the EU, then ESMA can issue new Regulatory Technical Standards, advising the National Competent Authorities on the exemption to supervisory enforcement of mandatory buy-ins.

“This regulatory initiative contained a number of critical design flaws as well as ambiguity around scope and process, not only from an implementation perspective, but also with respect to the potential implications for EU bond market liquidity and stability,” said ICMA, in reaction to the delay news. The association added that it “looks forward to engaging further with the European Commission and ESMA as they review the role of regulatory buy-ins in the European bond markets, and how this sits with the objectives of CMU.”

Speaking with The TRADE, Linda Gibson, Director and head of regulatory change at Pershing, said: “Nobody wants a regime implemented that is not fit for purpose, adversely impacts market liquidity and drives up costs for firms and clients alike.

“Clarity on the scope of the MBIs is still unclear in some key areas such as the instruments that are in scope – it is hoped that any postponement of the MBIs will allow sufficient time for MBIs to be revised in the CSDR Refit negotiations.”

The regulation was aimed at preventing settlement fails, but its unintended consequences had the potential to do more harm than good. There is no guarantees the rules will ever see the light of day in their current format as lobbying continues into the New Year and beyond.

Sources told The TRADE that it could be another long process. But in the meantime, this whole saga proved the strength of advocacy from the players who know the space best. The industry can finish the year with some degree of certainty, which is a welcome gift as we approach the festive period.