The European Commission has opened its review of the Central Securities Depository Regulation (CSDR) and its controversial buy-in regime after launching an industry consultation on the rules.
Earlier this year, the Commission announced it would delay implementation of the Settlement Discipline Regime (SDR), a key aspect of the rules, to February 2022 after receiving a wave of industry pushback due to the operational strain the COVID-19 pandemic has had on regulatory preparedness.
“The fact that the Commission is consulting on the settlement discipline framework should be viewed positively as a means of addressing outstanding market concerns,” said Paul Baybutt, senior product manager for securities services at HSBC.
It is expected that the majority of industry bodies and market participants will most likely focus their feedback on the settlement penalties and the buy-in components of SDR, which many have frequently warned would have a negative impact on trading and liquidity in Europe’s capital markets.
Trade bodies including the Association for Financial Markets in Europe (AFME) and the International Capital Markets Association (ICMA) have called for buy-ins to be optional.
“Key themes, from the discussions we’ve had, are simplification and recalibration of the penalty eligibility and rates with a view to making these more specific to the different products but also more straightforward to calculate,” said Pardeep Cassells, head of financial products at AccessFintech. “From a buy-in perspective, we’re expecting to see a range of requests from different contributors looking for everything from removal of the buy-in regime altogether to extended mandatory buy-in windows to a more discretionary set up. The role of buy-in agents is also likely to be a hot topic.”
The spike in settlement failures in March and April at the height of the pandemic highlighted to the industry and to market regulators that fail rates can be significantly impacted during times of market stress.
Data from the European Securities and Markets Association (ESMA) also revealed failures in equities and government bonds doubled to 12% and 6% respectively in March, caused by operational rather than liquidity issues.
“The regulators will face pressure to soften or eliminate the buy-in regime to prevent a negative market impact in the event of future market stress/crises,” said Virginie O’Shea, founder of Firebrand Research.
“The EU is unlikely to want to remove both the settlement penalty regime and the buy-in regime, so the latter will probably face the most criticism because of its operational complexity in terms of implementation. If it had been in place in Q1/2, the cost to firms would have been significant this year.”
Some market participants are hoping for widescale changes to the SDR and have called for regulators to scrap the buy-in rules altogether. According to an audience poll conducted at the Network Forum Autumn Meeting, over a third said they wanted buy-ins to be removed, while nearly 40% said they expect the scope of the penalties and buy-ins to change. However, it is unlikely the Commission will adhere.
“We expect to see the spirit of the current draft of the regulation upheld, which means that we do not foresee either penalties or buy-ins disappearing from the SDR plans in their entirety,” added Cassells.