CSDR consultation is over, ICMA underscores need for mandatory buy-in reforms
02 February 2021 UK
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The International Capital Markets Association (ICMA) is using the Central Securities Depositories Regulation (CSDR) consultation to reiterate its calls for the mandatory buy-in element of the settlement discipline regime (SDR) to be scrapped.
The European Commission opened itself up to feedback on the regulation’s terms in December with a deadline for comment of 2 February.
The consultation is believed to be the last chance for trade bodies and other stakeholders to convince EU regulators that the SDR is not fit for purpose and must be significantly altered before it’s belated go-live in February 2022.
In its response, the association argues that buy-ins, whether regulatory or contractual, should be discretionary and not mandatory.
Mandating buy-ins will have adverse impacts for European bond market efficiency and liquidity, ICMA says, noting that a significant body of evidence suggests it will ultimately lead to increased costs for market participants and particularly end investors.
The consultation was scheduled as part of the usual bedding in of EU regulation but scope being reviewed was expanded to include the SRD following claims by ICMA and others that the existence of mandatory buy-ins during the market volatility seen in March and April last year would have compounded the troubles.
“Analysis using settlement efficiency data illustrates not only how extensive and disruptive a mandatory buy-in regime would be for European bond markets under normal conditions, but that the procyclical impacts during the March-April 2020 COVID-19 market turmoil could have been catastrophic,” ICMA states.
In its response, ICMA presents a ‘waterfall’ of proposals for implementing the SDR, based on its members’ assessment of what it considers most optimal in terms of minimising disruption to the orderly functioning of Europe’s bonds markets, while still attaining the objective of improved settlement efficiency.
The first option is to implement cash penalties, but not regulatory buy-ins, with ICMA outlining the need for and design of a regulatory buy-in regime should be subject to a robust market impact assessment
Second, mandate that all EU investment firms have in place contractual frameworks to remedy fails.
Or, third, the association suggests implementing regulatory buy-ins as a last resort but with several critical revisions to the current framework.
Moreover, ICMA says that if buy-ins are to remain part of CSDR, the rule will require many revisions.
These include symmetrical payments for the buy-in and cash compensation differential; the introduction of a pass-on mechanism; greater flexibility in the requirement to appoint a buy-in agent; a clarification (and narrowing) of scope; and a more workable cash
settlement (‘cash compensation’) mechanism for illiquid bonds;
Additionally, ICMA recommends a "more tailored timeline" for completing the buy-in; and guaranteed delivery for the buy-in process.
ICMA says members are concerned about the current implementation schedule for the buy-in regime, the timetable for any revisions, and the resulting costs and disruptions to the industry of introducing changes “mid-flight”.
“They strongly believe that the buy-in regime should accordingly be delayed,” ICMA concludes.
Given today’s consultation deadline and the expected period needed by regulators to review all responses, stakeholders are warning that if feedback on amendments only appears in Summer or even Autumn it would leave market participants with very little time to accommodate even minor changes to the regulation before the February go-live date.
ICMA closed its response letter with a call for cooperation and communication between regulators and the market and reaffirmed it stands ready to field any questions the European Commission may have.
The European Commission opened itself up to feedback on the regulation’s terms in December with a deadline for comment of 2 February.
The consultation is believed to be the last chance for trade bodies and other stakeholders to convince EU regulators that the SDR is not fit for purpose and must be significantly altered before it’s belated go-live in February 2022.
In its response, the association argues that buy-ins, whether regulatory or contractual, should be discretionary and not mandatory.
Mandating buy-ins will have adverse impacts for European bond market efficiency and liquidity, ICMA says, noting that a significant body of evidence suggests it will ultimately lead to increased costs for market participants and particularly end investors.
The consultation was scheduled as part of the usual bedding in of EU regulation but scope being reviewed was expanded to include the SRD following claims by ICMA and others that the existence of mandatory buy-ins during the market volatility seen in March and April last year would have compounded the troubles.
“Analysis using settlement efficiency data illustrates not only how extensive and disruptive a mandatory buy-in regime would be for European bond markets under normal conditions, but that the procyclical impacts during the March-April 2020 COVID-19 market turmoil could have been catastrophic,” ICMA states.
In its response, ICMA presents a ‘waterfall’ of proposals for implementing the SDR, based on its members’ assessment of what it considers most optimal in terms of minimising disruption to the orderly functioning of Europe’s bonds markets, while still attaining the objective of improved settlement efficiency.
The first option is to implement cash penalties, but not regulatory buy-ins, with ICMA outlining the need for and design of a regulatory buy-in regime should be subject to a robust market impact assessment
Second, mandate that all EU investment firms have in place contractual frameworks to remedy fails.
Or, third, the association suggests implementing regulatory buy-ins as a last resort but with several critical revisions to the current framework.
Moreover, ICMA says that if buy-ins are to remain part of CSDR, the rule will require many revisions.
These include symmetrical payments for the buy-in and cash compensation differential; the introduction of a pass-on mechanism; greater flexibility in the requirement to appoint a buy-in agent; a clarification (and narrowing) of scope; and a more workable cash
settlement (‘cash compensation’) mechanism for illiquid bonds;
Additionally, ICMA recommends a "more tailored timeline" for completing the buy-in; and guaranteed delivery for the buy-in process.
ICMA says members are concerned about the current implementation schedule for the buy-in regime, the timetable for any revisions, and the resulting costs and disruptions to the industry of introducing changes “mid-flight”.
“They strongly believe that the buy-in regime should accordingly be delayed,” ICMA concludes.
Given today’s consultation deadline and the expected period needed by regulators to review all responses, stakeholders are warning that if feedback on amendments only appears in Summer or even Autumn it would leave market participants with very little time to accommodate even minor changes to the regulation before the February go-live date.
ICMA closed its response letter with a call for cooperation and communication between regulators and the market and reaffirmed it stands ready to field any questions the European Commission may have.
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CSDR consultation: EACH calls for delays to settlement discipline regime
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