ESMA in a pickle over buy-ins
25 March 2015 Brussels
Image: Shutterstock
The mandatory buy-in regime present in the Central Securities Depository Regulation (CSDR) is “an interesting conundrum” for the European Securities and Markets Authority (ESMA), according to chair Steven Maijoor.
Speaking to members of a European parliamentary committee on economic and monetary affairs on 24 March, Maijoor described the buy-in regime as one of the most difficult aspects of implementing the CSDR.
Buy-ins, which are currently discretionary, would become mandatory under the CSDR, meaning that an appointed agent would be able to step in and buy securities at market value for guaranteed delivery if they are not delivered within a specified time frame.
The authority proposed applying the buy-in framework to central securities depositories (CSDs) and participants, but many want to see it executed at the trading level, “by the clients, or the clients of the clients, of the participant”, explained Maijoor.
Banks and CSDs claim “that if they face the risk of the cost of the buy-in, they will demand guarantees and collateral to their clients to cover that risk, rendering the system more expensive”.
But EMSA worries that if buy-ins are left to the discretion of ultimate clients, which may sit outside of the EU and the authority’s control, “obvious enforceability problems” will render the regime “inapplicable”.
“ESMA is, therefore, facing here an interesting conundrum, which is our current priority,” he said.
An International Capital Market Association (ICMA) report recently claimed that the mandatory buy-in regime could cause liquidity across secondary European bond and financing markets to reduce, as bid offer spreads widen dramatically.
The report argued that more stable, fixed-term markets may see a dramatic widening of spreads for more liquid securities including some sovereign and public bonds, and most corporate bonds.
It estimated that the cost of mandatory buy-in regime for bond markets would amount to about €1.4 billion per €1 trillion of annual volume.
For the repo market, the estimated annual cost to the market is about €3.14 billion.
Speaking to members of a European parliamentary committee on economic and monetary affairs on 24 March, Maijoor described the buy-in regime as one of the most difficult aspects of implementing the CSDR.
Buy-ins, which are currently discretionary, would become mandatory under the CSDR, meaning that an appointed agent would be able to step in and buy securities at market value for guaranteed delivery if they are not delivered within a specified time frame.
The authority proposed applying the buy-in framework to central securities depositories (CSDs) and participants, but many want to see it executed at the trading level, “by the clients, or the clients of the clients, of the participant”, explained Maijoor.
Banks and CSDs claim “that if they face the risk of the cost of the buy-in, they will demand guarantees and collateral to their clients to cover that risk, rendering the system more expensive”.
But EMSA worries that if buy-ins are left to the discretion of ultimate clients, which may sit outside of the EU and the authority’s control, “obvious enforceability problems” will render the regime “inapplicable”.
“ESMA is, therefore, facing here an interesting conundrum, which is our current priority,” he said.
An International Capital Market Association (ICMA) report recently claimed that the mandatory buy-in regime could cause liquidity across secondary European bond and financing markets to reduce, as bid offer spreads widen dramatically.
The report argued that more stable, fixed-term markets may see a dramatic widening of spreads for more liquid securities including some sovereign and public bonds, and most corporate bonds.
It estimated that the cost of mandatory buy-in regime for bond markets would amount to about €1.4 billion per €1 trillion of annual volume.
For the repo market, the estimated annual cost to the market is about €3.14 billion.
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