The looming threat of mandatory buy-ins could soon disappear in Europe after new proposal

The European Parliament proposes dispensing of mandatory buy-ins altogether, while entry into the Official Journal of the European Union stops rule from coming into force until November 2025.

Two major developments have occurred this week involving mandatory buy-ins under European regulation, one of which could see the dispensing of the controversial requirement altogether.

The aspect of the Central Securities Depositories Regulation (CSDR) which had previously left the securities industry and the regulators at loggerheads remained in limbo up until now, despite being taken out of settlement requirements which came into force in February.

The latest communication from the European Commission regarding the buy-ins came in March, when they were removed them from the regulation, with the vague caveat that they could be reintroduced if fail rates didn’t improve.

The lack of clarity and parameters in which they could be reintroduced continued to frustrate the securities industry, which is already battling with increased settlement fail rates and inadequate benchmarks to understand whether these could lead to a reintroduction of the buy-in rule.

However, earlier this week, the European Parliament published a report in which it is proposing to dispense with mandatory buy-ins altogether. This follows similar recommendations from the European Commission.

“This is a significant development if approved and clearly shows that the Parliament is sharing the concern that MBI creates a significant interference to the functioning of securities markets,” wrote Paul Baybutt, global product head, middle-office at HSBC – one of the leading commentators on CSDR and former chair of the Investment Association’s Post Trade Committee for seven years.

The report stated: “Free-of-payment securities transfers made in the context of the (de)mobilisation of collateral, whether those transfers are between private parties or between members of the ESCB and their counterparties, do not involve ‘two trading parties’, and should, therefore, be exempted from the application of the settlement discipline regime.”

If this were to be approved, the industry would have one less settlement-related headache to worry about as it continues to battle with issues around CSDR penalties and fail rates throughout the continent.

In addition, today it was also entered into the Official Journal of the European Union that mandatory buy-ins would not come into force until at least November 2025. While the entry could be redundant if the Parliament’s proposal goes through, it acknowledged the drawbacks could outweigh the benefits.

The entry recognised knock-on effects such as wider bid-offer spreads, reduced market efficiency and reduced incentives to lend securities in the securities lending and repo markets and to settle transactions with central securities depositories.

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