The widely anticipated delay of the mandatory buy-in (MBI) regime is a topic that has been widely discussed among EU institutions; however, up until this point, the industry has not received its desired clarity around the rules or any certain indication of a delay.
The prospect of delaying MBI is currently being discussed at EU level in the wider context of discussions between the EU legislative bodies regarding the Distributed Ledger Technology (DLT) Pilot Regime. With each week, market participants hope to receive an update that would ease their growing concerns – the next meeting and chance for the EU to act is occurring on the 24 November – though as of yet, it has been radio silence.
In September, 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.
A month later The TRADE wrote how sources had explained there was a “degree of panic” setting in as the European Council, Commission and Parliament failed to provide any updates on ESMA’s request.
Since its inception, support for the postponement of the controversial MBI rules has gathered immensely and as we’re only months away from the current implementation date, buy-side firms are starting to worry about how to move forward.
“On the basis that a political consensus is achieved to bring about a delay in the implementation of MBI, ESMA would look to provide forbearance until the formal legislative process is complete to authorise the delay and then put in place the necessary amendment to Level 2 legislation to effect a delay in implementation,” said Linda Gibson, director, head of regulatory change at BNY Mellon’s Pershing. “We understand that if confirmed, a postponement of some two-three years for the introduction of the MBIs is envisaged.”
Although at the time ESMA’s recommendation came as a relief to market participants and the numerous trade associations who have lobbied against the rules under the Central Securities Depositories Regulation (CSDR) in recent years, a delay would still fall short of their hopes for a scaling back of the rules.
Speaking on the guidance and transparency needed from ESMA by businesses, Gibson added that clarity on the responsibility for a buy-in within a chain is necessary. “The legislation did not seem to take account of the buy-in chain and this effectively meant that each party that had failed to receive was required to initiate its own buy-in,” she explained.
“Nobody wants a regime implemented that is not fit for purpose and results in adversely impacting market liquidity and driving 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 current discussions around the postponement of CSDR MBI requirements may leave some businesses confused as to how best to respond. However, Gibson suggests that it is best for businesses to prepare just in case.
The buy-side, in particular, is worried about the upcoming MBI deadline. Some experts see this is a front-office issue as much as it is a back-office issue.
It is expected that fixed-income traders will be more impacted by the MBI rules when compared to equities, specifically in respect to liquidity. Industry participants and trade associations have pointed out the detrimental impact the rules could have on liquidity, which in the fixed income space, is likely to get worse due to the new regulation.
In ESMA’s letter sent to the EC in September, it highlighted 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 changes and they may face increased costs due to changing their systems and processes later to align with potential amendments of buy-in rules.
Even though it is believed that there is recognition at EU level that the market as a whole would benefit from a postponement, Gibson pointed out that businesses should still be ready in case the MBI requirements do go ahead as planned.
“Meanwhile, prepare to implement… In short, get ready but don’t press go,” commented Gibson.
The industry’s push back to the MBI rules goes to show how impactful the rules will be and there is wide ongoing discussion about how best businesses can prepare and position themselves ahead of February 2022.
“To tackle the buy-ins, systems and processes need to be able to identify the trades that are in scope, calculate the expected buy-in costs, ensure the timely instruction to the buy-in agent and, if they are the buyer, communicate with the counterparty to report the buy-in costs,” said Daniel Carpenter, head of regulation at Meritsoft, a Cognizant company.
“They need to claim, track, and process those costs at the same time. Finally, the buyer must report to their custodians or directly to the appropriate CSD. On the other hand, the seller must be ready to receive and process the buy-in notices and ensure they report the cost to their clients if needed.”
Where businesses are a trading party, it is recommended that they appoint a buy-in agent. Further, counterparties should be contacted to agree terms and conditions.
In addition, considering that CSDR is designed to improve settlement efficiency across the market, Gibson suggests that businesses should review their processes to monitor and prevent fails and how they will accurately book penalties to their underlying clients.
“Buy-side firms really need to be active as they will be impacted by the settlement discipline regime in every sense: confirmations and allocations, cash penalties and buy-ins,” added Gibson.
Tomorrow, a trilouge meeting has been scheduled on the DLT Pilot Regime where CSDR has been listed under AOB for the agenda. It is hoped that the meeting will be able to shed some light on the MBI rules and their possible postponement, though given recent history, the market is advised not to hold its breath.