Will the EU’s CSDR failed-trade buy-in provisions be delayed?

The implementation of compulsory buy-in provisions in the European Union as a remedy for failed trades, set for February 1, is likely to be delayed, Haroun Boucheta, head of public affairs at BNP Paribas Securities Services, tells Funds Europe. 

If pushed through according to schedule, Boucheta says, the buy-in regime would be a “nightmare for the whole industry.” In the short term, it would disrupt liquidity throughout the market, he says. “We are confident that it will be postponed,” he says, adding that a decision may be made this month.  

“We are following the ongoing discussions in Brussels and can confirm that no decision has been taken yet,” said a spokeswoman for the European Securities and Markets Authority (Esma) on November 9. 

The Central Securities Depositories Regulation (CSDR) aims to improve the safety and security of settlement and create a level playing field among central securities depositories (CSDs) in the EU. It seeks to create an integrated market for securities settlement, with no distinction between national and cross-border transactions. It also applies to Iceland, Liechtenstein and Norway, included by virtue of the European Economic Treaty, and opens the possibility that different standards will operate in the EU and the UK. 

The buy-in provisions are part of the implementation of the third phase of CSDR. Other settlement discipline changes, such as reporting of failed trades and cash penalties are also scheduled to come into effect on February 1. Esma in September wrote to the European Commission asking for a delay to the buy-in regime. A decision was needed as soon as possible, Esma said in the letter. 

Buy-ins are used to give the purchaser a contractual right to buy securities despite the failure of the initial transaction. The aim is to restore the counterparties to the position they would have been in had the transaction completed, though in practice the failing counterparty is likely to be penalised. The practice can affect price discovery, especially for illiquid securities, as buy-ins send a signal to the market that the securities will be purchased at a premium for guaranteed delivery. 

Industry Push-Back 

BNP Paribas has been part of an industry-wide pushback against the measure, which Boucheta says needs to be delayed for two years to ensure smooth transition. Legal and technical issues including the required modifications of contracts have not been addressed, he says. “The vast majority of the industry is not ready. Some CSDs are not ready at all.”

Implementing the rules on the current timetable would mean reduced market liquidity, “disproportionately increase costs for issuers and investors, and ultimately place EU financial institutions and their clients at a competitive disadvantage,” according to a letter signed by 16 trade associations to the EU and Esma in July. 

That makes postponement the best option, the letter argues. “Enforcing the current rules, only to revise them at a later date, would not only risk damaging the competitiveness of EU capital markets and increasing costs for investors, but would also lead to a duplication of efforts and significant unnecessary disruption.” 

© 2021 funds europe

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