European regulators struggle to progress SDR buy-in delay as ‘degree of panic’ sets in across the industry

A delay of the controversial buy-in rule continues to be considered, but without any action, unrest is setting in among market participants as deadline for implementation looms.

There is a growing fear among market participants and trade associations around the timeline for delaying Europe’s controversial mandatory buy-in rules, which are part of the Central Securities Depositories Regulation (CSDR) Settlement Discipline Regime.

The saga has rumbled on for years now, with trade associations sending countless appeals to regulators to delay or amend the buy-in rule which they believe could lead to increased costs, reduced liquidity and reduced returns for investors. 

A trilogue – an informal tripartite meeting between the European Council, Commission and Parliament to reach provisional agreement on legislative files – took place earlier this week. But sources told The TRADE’s sister publication Global Custodian, that there was “no significant progress on a potential SDR buy-in delay”.

They added there is a “fear the delay won’t be in place before the implementation date in February 2022”, while another source added: “There’s some degree of panic out there from the regulatory working groups” around the timeline of a potential delay.

The European Securities and Markets Authority (ESMA) wrote to the European Commission (EC) urging it to consider a delay of the mandatory buy-in regime under the Settlement Discipline Regime (SDR) currently scheduled for 1 February 2022, pushing for a decision by the end of October.

The trilogue represented an opportunity for ESMA to get the green light to move forward and implement a delay, but initial reports do not sound positive.

The only hope is that the Commission could decide to act on ESMA’s request for a delay, through legislation in the DLT Pilot Regime, which is in the final stages of negotiations. Others have suggested it could be shoehorned into the Digital Operational Resilience for Financial Services (DORA) regulation, due to the amount of time it will take to formally delay CSDR.

The most likely outcome is that legislation to delay the buy-ins may not be finalised until after 1 February 2022 – when the regulation is set to officially come into effect, or at least near enough to that date, which will not give participants enough time to prepare. If that is the case, ESMA said it is prepared to act to bridge the gap, possibly through a no-action relief letter or forbearance.

“The industry does not expect a Level 1 amendment to define new implementation dates; a Level 2 amendment would have the new date,” one expert said. Various trade associations have stressed the delay being included in Level 2 would need to be long enough to allow sufficient time for the buy-in rules to be amended, and the market to get ready for the amended rules.

The current timeline has the European Commission set to publish its legislative proposal by the end of the year.

In addition, sources explained that the reluctance appears to be the result of political dynamics rather than objection to the actual proposal.

“If there is political agreement that there needs to be a delay, then our attention will be on the Commission and ESMA for them to set out a roadmap that provides clarity to the market,” said one source close to the matter. “If there is no political agreement, then equally, the industry will be looking at the Commission and ESMA to come up with an alternative solution. It is difficult to see how it would now be possible for the industry to implement the current rules by the current deadline without massive disruption. “

ESMA is in favour of delaying the entry into force of the buy-in requirements while applying the other settlement discipline requirements, such as settlement fails reporting and cash penalties regime, as planned.

ESMA stated in its letter – sent on 24  September to the European Commission – that carrying on with the implementation of these two components as scheduled will positively contribute to improving settlement efficiency and the transparency around it in the EU.

The final EC legislative proposal for the review of CSDR is expected by the end of the year, which could possibly include changes to the buy-in regime.

In respect to the buy-in regime, ESMA noted two challenges in its letter to the Commission. One is the absence of clarity in respect to some open questions necessary for the implementation of the buy-in requirements.

The second challenge ESMA highlights is the lack of certainty regarding whether the EC’s legislative proposal will include changes to the mandatory buy-in rules and the extent of any of those possible amendments.

Market participants’ ability to implement the regime will be directly impacted by these challenges and they may face increased costs due to changing their systems and processes later to align with potential amendments of buy-in rules.

A letter from the Association of Financial Markets in Europe (AFME), the International Securities and Derivatives Association (ISDA), the International Securities Lending Association (ISLA) and the Investment Company Institute (ICI), among 10 others earlier this year noted: “A key concern for our respective members is that the current legislative timetable requires market participants to proceed with a major implementation exercise without any indication of the scope or timing of the review process – noting that some revisions to the mandatory buy-in regime are essential.

“At best this will result in ongoing implementation efforts and investment being rendered redundant; at worst it will mean repeating the exercise. Creating such uncertainty around a regulatory implementation project of this profile and scale is damaging to the development and reputation of the EU’s financial markets.”