AFME: CSDR mandatory buy-in rules are “fundamentally flawed”
21 October 2021 UK
Image: beermedia
The Central Securities Depositories Regulation (CSDR) rulings, relating to mandatory buy-ins, are “fundamentally flawed”, according to James Cunningham, head of European regulatory and market initiatives at BNY Mellon.
Cunningham made the comments on a panel at the Association for Financial Markets in Europe (AFME) 14th Annual European Post Trade Virtual Conference where he stated that the CSDR buy-in rules are “flawed” because they “are not specifically appropriate for the settlement process”.
Cunningham added: “There is a strong argument for delay [of the buy-in rules], and for the European Commission to change them in their upcoming proposal that we expect in January 2022”.
“If the January proposal is going to change the rules, there’s no point in implementing a flawed set of rules and subsequently changing them. There is a big question surrounding their significant impact on the market as a whole. How big of an impact? We do not yet know”, Cunningham added.
“The significance is that [the buy-in rules go] against the whole objective of the Capital Markets Union (CMU) initiative of trying to increase the size of capital markets in Europe. We [the industry] do hope this delay will be implemented within good time so we do not experience major disruption on the implementation date of 1 February.”
Voicing his opinion, Daniel Carpenter, head of regulation at Meritsoft, said: “There is a lack of clarity behind [the buy-in rules]. From a buy-ins perspective, over three years, we’ve been looking at how to integrate our platforms into other platforms to improve, but many houses are not going to be prepared for the level of automation that that needs.
“Therefore, they are going to have to do manual workarounds which begs the questions: ‘are they going to have the resources and skillset to do that manual workaround? And where will that come from?”, he added.
“You can link to instant messaging tools that can provide communication, but in terms of actually tracking on a day to day basis, working out the price movements behind it — bearing in mind the liquidity of the market — that’s going to be a huge issue for people.”
Moderator Pablo Portugal, managing director at Association for Financial Markets in Europe, asked the panel the biggest risks they currently saw when considering the current buy-in rule implementation date of 1 February.
Charifa El Otmani, head of capital markets strategy (interim), Swift, says: “We’ve gone through a period of instability with the delay due to COVID-19. Many industry players have taken the bet that the mandatory buy-in will be revisited and they may have to reprioritise that side of things. But a delay to the implementation may be even more complex and might have greater consequences than previous delays. Let’s see what comes out in Q1 next year, but we can expect that part of the market will not be ready.”
She added: “In terms of risk and the impact on business processes, the most significant impacts are probably going to be on portfolio and profit and loss activities, from an operational and accounting perspective.”
El Otmani continued: “But, how advanced are we as an industry in terms of technical readiness? That's the big question we need to ask ourselves at this point in time. If the mandatory buy-in is confirmed to take place on 1 February, are we ready for it?”
Jesús Benito, head of Iberclear-BME, SIX, highlighted his concern. He said: “I would like to avoid any sort of regulatory backlash between different jurisdictions, especially between the European Union and other buy-in regimes from other jurisdictions, in particular the UK. I think this should be avoided as much as possible for the sake of the European capital markets.”
Matt Johnson, director, digital platform management and industry relations at Depository Trust & Clearing Corporation (DTCC), said: “In theory, the CSDR and settlement discipline should make the European Economic Area (EEA) more harmonised, efficient and safe. The discipline should enforce better processes and behaviour to increase settlement finality which should result in an increase of investment into European assets and securities.”
Discussing jurisdictional differences, and the UK’s recent decision to opt out of the CSDR buy-in regime, Johnson continued: “Of course, there is difference between the EU and the UK now.”
“The UK is the biggest market outside of Europe and is going it alone with a discipline the rest of Europe is going to be forced to align with. My fear is that EU countries could follow the UK’s decision to opt out too down the line. What could be worrying is other EU states making a similar decision to the one the UK has made.”
Discussing the buy-in rules for Europe, Johnson said: “There is a lack of clarity, but also a lack of options. How can one institution possibly cover all securities? Or how can buy and sell-side firms inside and outside of EEA onboard every single institution at the fund level for the buy-side in time for the go live date? There just isn’t enough time to do it. It’ll take, in my estimation, three to five years to get everybody on board.
Later in the panel, Portugal asked panellists whether CSDR will act as a catalyst for increased automation in order to reduce fails.
El Otmani agreed it will. She said: “It has acted as a catalyst for change. There tends to be three sorts of players when it comes to regulation. Firstly, you have those players that will go for the ‘must-do’ where minimal implementation of change is seen.
“Secondly, you have players that will go for the ‘tactical implementation’ who will implement change to better their chances against competition. And thirdly, you will have those players who will look for the most strategic and future-proofing digital implementations, with greater automation and straight-through processing in mind. They are the ones who will be using shared platform services and exceptions management to their advantage — they will grasp the long-term benefits of CSDR.”
Johnson said: “It has very much to do with behaviour and how committed firms are to change things for the better. There are still 10 per cent of financial institutions still using manual operations. We should question ‘how can firms incorporate more robust practices as a way forward, particularly for post-trade?’”
Earlier in the day, Alex Dockx, executive director, head of securities services industry development at J.P Morgan held a Fireside Chat with Jennifer Robertson, acting head of unit for the European Commission.
In the chat, Robertson told conference delegates: “With a legislative proposal currently planned for January, it does not take a great deal of calculation to work out that the idea of the Commission adopting and negotiating with subsequent publication of any CSDR review is unlikely before 1 February 2022.
“It’s no secret there have been calls from market participants to postpone the application date of putting in to force the mandatory buy-in regime in order to avoid potentially duplicative costs which would potentially occur again if the Commission were to propose different changes to the mandatory buy-in regime, and of course, should the department or council modify it in any further way we are aware their will be real costs and potentially repetitive costs.”
Robertson concluded: “We will consider amending the CSDR review but any outcomes can not yet be assumed. We’re still analysing all these options as part of our impact assessment process. It is important to receive data from all sides of the argument to help us in our analysis and reflections moving forward.”
Cunningham made the comments on a panel at the Association for Financial Markets in Europe (AFME) 14th Annual European Post Trade Virtual Conference where he stated that the CSDR buy-in rules are “flawed” because they “are not specifically appropriate for the settlement process”.
Cunningham added: “There is a strong argument for delay [of the buy-in rules], and for the European Commission to change them in their upcoming proposal that we expect in January 2022”.
“If the January proposal is going to change the rules, there’s no point in implementing a flawed set of rules and subsequently changing them. There is a big question surrounding their significant impact on the market as a whole. How big of an impact? We do not yet know”, Cunningham added.
“The significance is that [the buy-in rules go] against the whole objective of the Capital Markets Union (CMU) initiative of trying to increase the size of capital markets in Europe. We [the industry] do hope this delay will be implemented within good time so we do not experience major disruption on the implementation date of 1 February.”
Voicing his opinion, Daniel Carpenter, head of regulation at Meritsoft, said: “There is a lack of clarity behind [the buy-in rules]. From a buy-ins perspective, over three years, we’ve been looking at how to integrate our platforms into other platforms to improve, but many houses are not going to be prepared for the level of automation that that needs.
“Therefore, they are going to have to do manual workarounds which begs the questions: ‘are they going to have the resources and skillset to do that manual workaround? And where will that come from?”, he added.
“You can link to instant messaging tools that can provide communication, but in terms of actually tracking on a day to day basis, working out the price movements behind it — bearing in mind the liquidity of the market — that’s going to be a huge issue for people.”
Moderator Pablo Portugal, managing director at Association for Financial Markets in Europe, asked the panel the biggest risks they currently saw when considering the current buy-in rule implementation date of 1 February.
Charifa El Otmani, head of capital markets strategy (interim), Swift, says: “We’ve gone through a period of instability with the delay due to COVID-19. Many industry players have taken the bet that the mandatory buy-in will be revisited and they may have to reprioritise that side of things. But a delay to the implementation may be even more complex and might have greater consequences than previous delays. Let’s see what comes out in Q1 next year, but we can expect that part of the market will not be ready.”
She added: “In terms of risk and the impact on business processes, the most significant impacts are probably going to be on portfolio and profit and loss activities, from an operational and accounting perspective.”
El Otmani continued: “But, how advanced are we as an industry in terms of technical readiness? That's the big question we need to ask ourselves at this point in time. If the mandatory buy-in is confirmed to take place on 1 February, are we ready for it?”
Jesús Benito, head of Iberclear-BME, SIX, highlighted his concern. He said: “I would like to avoid any sort of regulatory backlash between different jurisdictions, especially between the European Union and other buy-in regimes from other jurisdictions, in particular the UK. I think this should be avoided as much as possible for the sake of the European capital markets.”
Matt Johnson, director, digital platform management and industry relations at Depository Trust & Clearing Corporation (DTCC), said: “In theory, the CSDR and settlement discipline should make the European Economic Area (EEA) more harmonised, efficient and safe. The discipline should enforce better processes and behaviour to increase settlement finality which should result in an increase of investment into European assets and securities.”
Discussing jurisdictional differences, and the UK’s recent decision to opt out of the CSDR buy-in regime, Johnson continued: “Of course, there is difference between the EU and the UK now.”
“The UK is the biggest market outside of Europe and is going it alone with a discipline the rest of Europe is going to be forced to align with. My fear is that EU countries could follow the UK’s decision to opt out too down the line. What could be worrying is other EU states making a similar decision to the one the UK has made.”
Discussing the buy-in rules for Europe, Johnson said: “There is a lack of clarity, but also a lack of options. How can one institution possibly cover all securities? Or how can buy and sell-side firms inside and outside of EEA onboard every single institution at the fund level for the buy-side in time for the go live date? There just isn’t enough time to do it. It’ll take, in my estimation, three to five years to get everybody on board.
Later in the panel, Portugal asked panellists whether CSDR will act as a catalyst for increased automation in order to reduce fails.
El Otmani agreed it will. She said: “It has acted as a catalyst for change. There tends to be three sorts of players when it comes to regulation. Firstly, you have those players that will go for the ‘must-do’ where minimal implementation of change is seen.
“Secondly, you have players that will go for the ‘tactical implementation’ who will implement change to better their chances against competition. And thirdly, you will have those players who will look for the most strategic and future-proofing digital implementations, with greater automation and straight-through processing in mind. They are the ones who will be using shared platform services and exceptions management to their advantage — they will grasp the long-term benefits of CSDR.”
Johnson said: “It has very much to do with behaviour and how committed firms are to change things for the better. There are still 10 per cent of financial institutions still using manual operations. We should question ‘how can firms incorporate more robust practices as a way forward, particularly for post-trade?’”
Earlier in the day, Alex Dockx, executive director, head of securities services industry development at J.P Morgan held a Fireside Chat with Jennifer Robertson, acting head of unit for the European Commission.
In the chat, Robertson told conference delegates: “With a legislative proposal currently planned for January, it does not take a great deal of calculation to work out that the idea of the Commission adopting and negotiating with subsequent publication of any CSDR review is unlikely before 1 February 2022.
“It’s no secret there have been calls from market participants to postpone the application date of putting in to force the mandatory buy-in regime in order to avoid potentially duplicative costs which would potentially occur again if the Commission were to propose different changes to the mandatory buy-in regime, and of course, should the department or council modify it in any further way we are aware their will be real costs and potentially repetitive costs.”
Robertson concluded: “We will consider amending the CSDR review but any outcomes can not yet be assumed. We’re still analysing all these options as part of our impact assessment process. It is important to receive data from all sides of the argument to help us in our analysis and reflections moving forward.”
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