The great postponement
08 Dec 2021
Eliane Meziani, senior advisor and Rodolphe Carissimo, advisor for CACEIS public affairs talk to Jenna Lomax about the postponement of the CSDR mandatory buy-in rulings and why the market requires and deserves due time to prepare for it
Image: CACEIS
Please summarise your interpretation of the buy-in rules that are being enforced in February 2022?
As CACEIS detailed in its answer to the consultation last February, published in the name of The Association Française des Professionnels des Titres (AFTI), the settlement discipline regime is a component of Central Securities Depositories Regulation (CSDR) which is in critical need of change.
Admittedly, it has not yet entered into force. However, we already know that the current design, especially for the mandatory buy-in requirement, will create fundamental issues and have a severe impact on the market.
The current regime has two main characteristics. The first is a strict and constrained framework which forces the end buyer to accept cash instead of the expected securities should the buy-in be unsuccessful, and which prevents the use of other existing mechanisms, such as International Capital Market Association (ICMA) rules or buyer protection, which are also admitted outside Europe.
The second characteristic is a systematic application that will lead to pointless or irrational purchases, because a single lack of stock will most likely trigger several buy-ins and because the current scope includes all types of transaction — thus submitting to the mandatory buy-in portfolio transfers, realignments, collateral movements, primary market-related transactions, or even the buy-in itself.
In March 2021, an alliance of 14 trade bodies called for CSDR buy-in delay and that the buy-ins should be held back from implementation schedule until these are fit for purpose. What are your thoughts on this?
CACEIS is fully in line with this alliance: building this new buy-in regime requires and deserves due time. Accordingly, there is a need to postpone its activation by, for example, decoupling the penalties from the buy-ins. CACEIS is in favour of a two-step approach, which would provide an opportunity for the penalty regime to take effect and for the impact to be adequately monitored and assessed by the authorities.
It seems we have been heard, since the European Securities and Markets Authority (ESMA) has clearly stated in a letter to the Commission, sent on 24 September, that it is in favour of delaying the entry into force of the buy-in requirements until after 1 February.
The industry’s legitimate request — relayed by ESMA — appears to have been taken into account by the European authorities. On 24 November, the Commission announced — through the European Commissioner for Financial Services and the Financial Stability and Capital Markets Union — its decision to postpone implementation of the mandatory buy-in regime. This decoupling of mandatory buy-ins from the rest of the regulatory discipline has been possible as a result of the introduction of a legislative rider within the Pilot Regime Regulation, with the trilogue conducted over the past few weeks.
The European institutions have agreed to a postponement that might extend over years, thus giving the industry the necessary time to comply with these new obligations and to prepare confidently for the future revision of CSDR planned for 2022.
What opportunities will the buy-in rules bring in terms of uniformity across EU member states and what are the most challenging areas of the rulings? What has been CACEIS’ experience in navigating and preparing for them?
Buy-in rules are addressing a specific issue, which is the failure of a trade settlement. They have been designed as a deterrent against failing parties, which may be required to provide cash compensation.
This will require a healthy range of buy-in agents which need to exist to fulfill this regulatory requirement — and this raises concerns as to whether such a requirement can be implemented otherwise. In conclusion, the result may be that many buy-ins in illiquid securities will be unsuccessful, resulting in mandatory cash compensation.
The most challenging area, in implementing the rulings, may be to identify the adverse impact and undesired consequences that would potentially result.
Buy-ins, whether regulatory or contractual, should be discretionary and not mandatory. Do you agree with this?
Buy-ins should not be mandatory since this obligation could result in multiple negative consequences for the financial market (difficulties from liquidity, prices, transactions costs in particular for illiquid securities). Moreover, this obligation appears to be disproportionate, given the low volume of failed transactions in recent times.
The option of a voluntary buy-in reduces the burden on regulatory authorities and creates greater flexibility for market-driven solutions. The prescriptive nature of the current regulation (Level 1 and Level 2) will not facilitate the implementation of effective market practices.
Finally, CACEIS wishes to underline the threat of a mandatory EU membership regime by considering the decisions of third countries such as the UK not to implement the CSDR discipline regime.
This could distort competition by favouring non-EU central securities depositories, rather than those of the EU, and weakening the European financial market at a time when the EU wants to get rid of dependence on third-country financial centres (and of the UK in particular, which has embarked on the path of regulatory divergence on CSDR, as on many other texts such as Packaged Retail Investment and Insurance Products and General Data Protection Regulation).
In what ways would the mandating of buy-ins have an adverse impact on European liquidity? And how could this affect end investors, in particular?
An impact study conducted by ICMA in 2019 shows that the settlement discipline regime will have a significant negative impact on pricing and liquidity.
While the detrimental impact will affect all classes of bonds, they will be more significant with respect to less actively traded corporate and sovereign bonds, high yield, and emerging markets.
Furthermore, the regime will indirectly deter lending of securities, again with the least liquid bond classes being most significantly impacted.
Do you think the proposed regulatory buy-ins should be seen as a last resort in response to industry failures?
They should be considered only as a last resort response to industry failures, otherwise this action could lead to undesired consequences for market participants. Furthermore, the postponement recently granted by the European institutions should be used to stabilise the penalty regime.
This decision will give the authorities the time and distance needed to assess the behaviour of players and evaluate the effectiveness of the penalty regime before introducing, if necessary, a buy-in system which should nevertheless be limited to genuinely risky transactions (and not to all categories of securities settlement as was originally planned).
The scope of the mandatory buy-in regime is crucial for CACEIS and for the whole industry. Consequently, we are pleased to note — through recent informal exchanges — that the European authorities are taking this issue very seriously and consider it a priority.
As CACEIS detailed in its answer to the consultation last February, published in the name of The Association Française des Professionnels des Titres (AFTI), the settlement discipline regime is a component of Central Securities Depositories Regulation (CSDR) which is in critical need of change.
Admittedly, it has not yet entered into force. However, we already know that the current design, especially for the mandatory buy-in requirement, will create fundamental issues and have a severe impact on the market.
The current regime has two main characteristics. The first is a strict and constrained framework which forces the end buyer to accept cash instead of the expected securities should the buy-in be unsuccessful, and which prevents the use of other existing mechanisms, such as International Capital Market Association (ICMA) rules or buyer protection, which are also admitted outside Europe.
The second characteristic is a systematic application that will lead to pointless or irrational purchases, because a single lack of stock will most likely trigger several buy-ins and because the current scope includes all types of transaction — thus submitting to the mandatory buy-in portfolio transfers, realignments, collateral movements, primary market-related transactions, or even the buy-in itself.
In March 2021, an alliance of 14 trade bodies called for CSDR buy-in delay and that the buy-ins should be held back from implementation schedule until these are fit for purpose. What are your thoughts on this?
CACEIS is fully in line with this alliance: building this new buy-in regime requires and deserves due time. Accordingly, there is a need to postpone its activation by, for example, decoupling the penalties from the buy-ins. CACEIS is in favour of a two-step approach, which would provide an opportunity for the penalty regime to take effect and for the impact to be adequately monitored and assessed by the authorities.
It seems we have been heard, since the European Securities and Markets Authority (ESMA) has clearly stated in a letter to the Commission, sent on 24 September, that it is in favour of delaying the entry into force of the buy-in requirements until after 1 February.
The industry’s legitimate request — relayed by ESMA — appears to have been taken into account by the European authorities. On 24 November, the Commission announced — through the European Commissioner for Financial Services and the Financial Stability and Capital Markets Union — its decision to postpone implementation of the mandatory buy-in regime. This decoupling of mandatory buy-ins from the rest of the regulatory discipline has been possible as a result of the introduction of a legislative rider within the Pilot Regime Regulation, with the trilogue conducted over the past few weeks.
The European institutions have agreed to a postponement that might extend over years, thus giving the industry the necessary time to comply with these new obligations and to prepare confidently for the future revision of CSDR planned for 2022.
What opportunities will the buy-in rules bring in terms of uniformity across EU member states and what are the most challenging areas of the rulings? What has been CACEIS’ experience in navigating and preparing for them?
Buy-in rules are addressing a specific issue, which is the failure of a trade settlement. They have been designed as a deterrent against failing parties, which may be required to provide cash compensation.
This will require a healthy range of buy-in agents which need to exist to fulfill this regulatory requirement — and this raises concerns as to whether such a requirement can be implemented otherwise. In conclusion, the result may be that many buy-ins in illiquid securities will be unsuccessful, resulting in mandatory cash compensation.
The most challenging area, in implementing the rulings, may be to identify the adverse impact and undesired consequences that would potentially result.
Buy-ins, whether regulatory or contractual, should be discretionary and not mandatory. Do you agree with this?
Buy-ins should not be mandatory since this obligation could result in multiple negative consequences for the financial market (difficulties from liquidity, prices, transactions costs in particular for illiquid securities). Moreover, this obligation appears to be disproportionate, given the low volume of failed transactions in recent times.
The option of a voluntary buy-in reduces the burden on regulatory authorities and creates greater flexibility for market-driven solutions. The prescriptive nature of the current regulation (Level 1 and Level 2) will not facilitate the implementation of effective market practices.
Finally, CACEIS wishes to underline the threat of a mandatory EU membership regime by considering the decisions of third countries such as the UK not to implement the CSDR discipline regime.
This could distort competition by favouring non-EU central securities depositories, rather than those of the EU, and weakening the European financial market at a time when the EU wants to get rid of dependence on third-country financial centres (and of the UK in particular, which has embarked on the path of regulatory divergence on CSDR, as on many other texts such as Packaged Retail Investment and Insurance Products and General Data Protection Regulation).
In what ways would the mandating of buy-ins have an adverse impact on European liquidity? And how could this affect end investors, in particular?
An impact study conducted by ICMA in 2019 shows that the settlement discipline regime will have a significant negative impact on pricing and liquidity.
While the detrimental impact will affect all classes of bonds, they will be more significant with respect to less actively traded corporate and sovereign bonds, high yield, and emerging markets.
Furthermore, the regime will indirectly deter lending of securities, again with the least liquid bond classes being most significantly impacted.
Do you think the proposed regulatory buy-ins should be seen as a last resort in response to industry failures?
They should be considered only as a last resort response to industry failures, otherwise this action could lead to undesired consequences for market participants. Furthermore, the postponement recently granted by the European institutions should be used to stabilise the penalty regime.
This decision will give the authorities the time and distance needed to assess the behaviour of players and evaluate the effectiveness of the penalty regime before introducing, if necessary, a buy-in system which should nevertheless be limited to genuinely risky transactions (and not to all categories of securities settlement as was originally planned).
The scope of the mandatory buy-in regime is crucial for CACEIS and for the whole industry. Consequently, we are pleased to note — through recent informal exchanges — that the European authorities are taking this issue very seriously and consider it a priority.
NO FEE, NO RISK
100% ON RETURNS If you invest in only one asset servicing news source this year, make sure it is your free subscription to Asset Servicing Times
100% ON RETURNS If you invest in only one asset servicing news source this year, make sure it is your free subscription to Asset Servicing Times
