The effects of the upcoming central securities depositary regulation (CSDR) will have the biggest impact on securities lending according to the head of market advocacy at Deutsche Bank.
Central Securities Depository Regulation (CSDR) enforces a buy-in regime for both securities and short-term financing transactions. This means the lender of a security will have to enter the market to buy back the security on loan if the borrower has failed in the transaction.
This could potentially lead to a loss of market liquidity and push institutional lenders away from the securities lending market.
Speaking at the NeMa pre-conference summit in Dubrovnik, Angus Fletcher spoke of how the impact of CSDR could be a ‘double edged sword.’
“On the one hand CSDR is an opportunity from a settlement discipline point of view because it is a chance to ensure that transactions don’t fail because failure would mean settlement fines and other charges.
“But then the question is in securities finance transactions (SFT), which securities lending and repo are part of and are actually in scope for the client regime simultaneously under certain terms of CSDR. Therefore, looking at how they will be arranged under this regulation is going to be crucial,” said Fletcher.
His comments echo the similar claims from the International Securities Lending Association (ISLA) which slammed the EU Buy-In regime under CSDR. The association warned that Europe’s securities lending market could face a significant shortage of liquidity as a result of incoming rules on failed trades.
Having received approval by the European parliament in 2014, CSDR is designed to harmonise the timing and conduct of settlements across Europe.
Earlier this month the European Securities and Markets Authority (ESMA) has launched a consultation on participant default rules and procedures under CSDR.
Fletcher also added that the securities finance transaction regulation (SFTR) designed to increase transparency will bring a sizable challenge from a reporting point of view.