UK confirms it will not adopt CSDR buy-in regime

The Treasury has said it will not implement SDR in February 2021, but UK firms will still have to comply with the buy-in regime for EU transactions.

The UK Treasury has confirmed it will not implement the Settlement Discipline Regime (SDR) next year, including the controversial buy-in regime.

Rishi Sunak, UK Chancellor of the Exchequer, said in a statement on the UK Treasury’s website that the rules will not be implemented as planned in February 2021 and UK firms should instead continue to apply the existing framework.

“It will therefore consider the future approach to the UK’s settlement discipline framework, given the importance of ensuring that regulation facilitates the settlement of market transactions in a timely manner while sustaining market liquidity and efficiency,” Sunak said. “Any future legislative changes will be developed through dialogue with the financial services industry, and sufficient time will be provided to prepare for the implementation of any new future regime.” 

The move means that traders in the UK will not have to comply with the buy-in regime, although UK-based firms will still have to adhere to the rules for all European transactions that are settled with European central securities depositories.

“The majority of capital markets firms operate globally, having footholds or transactions flowing through the EU, UK, US and APAC regions, and will therefore be pulled into CSDR,” Daniel Carpenter, head of regulation at Cognizant firm Meritsoft, commented on the development. “Specifically, there will be many UK-based investment managers who will be settling transactions across the EU and will need to make sure that they are compliant with this regulation.

“This regulation highlights that reducing the number of trade fails is best practice and commercially beneficial. As a result, improving processes will no doubt be looked at favourably by UK firms, even following yesterday’s statement.”

The decision not to adopt the rules could signify the UK’s intent to not adhere to EU legislation post-Brexit. In addition to the SDR, the UK said it will not enforce non-financial counterparties to comply with the reporting rules laid out in the Securities Financing Transactions Regulation (SFTR). In March, several industry experts told The TRADE that the UK may decide not to adopt the buy-in regime post-Brexit.

Europe’s securities watchdog recently denied a formal request from multiple industry groups to defer or amend the mandatory buy-in regime and phase-in the new rules for failed settled trades, after it was forced to postpone the rules from September 2020 to February 2021 amid intense lobbying from industry associations.

Buy-ins have typically been used at discretion as they can create unpredictable costs, and are used by market participants to manage settlement risk in the case of failed trades. Initiating a buy-in against a failing counterparty will become a legal obligation under the CSDR regime, with limited flexibility on timing to complete the process.

The rules around buy-ins under CSDR have proved controversial with many industry groups and associations which have warned the requirements would harm liquidity in bond markets and increase trading costs. The Investment Association and the International Capital Market Association’s Asset Management and Investors Council urged regulatory authorities in February to exclude cash bond markets and phase-in the implementation of the CSDR buy-in regime due to concerns around the regime’s potential impact on markets.