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CSDR settlement discipline
While CSDR deals mainly with the regulation of Europe’s settlement systems, it contains a section on ‘settlement discipline’. This  includes measures to improve settlement efficiency, such as cash penalties for fails. Among these measures is the provision for mandatory buy-ins: which is essentially market regulation, with very direct risk management consequences for market investors, intermediaries, and liquidity providers.   

The CSDR buy-in provisions are due to come into force from 1 February 2021 and will also apply to non-EU/EEA domiciled trading entities.

ICMA has long supported and advocated for measures to improve settlement efficiency in the European fixed income and collateral markets. Notwithstanding this, ICMA has also long advocated against the implementation of a mandatory buy-in regime in the non-cleared bond markets and has raised concerns with the regulatory authorities with respect to the potential negative impacts it will have on market liquidity and stability. ICMA will continue to raise awareness of the likely unintended consequences of the regulation and question the need for a mandatory buy-in regime. ICMA is also working hard on ensuring the smooth implementation of the regulation. As well as raising market awareness of the regulatory requirements, it is looking to establish market standards and processes, primarily through its well established and widely utilised Buy-in Rules, to support implementation, while also attempting to address some of the regulation’s more challenging provisions.

See also: CSDR-SD Working Group





23 June 2020: UK elects not to implement CSDR-SD measures
The UK Treasury has published a Written Ministerial Statement The UK Treasury has published a Written Ministerial Statement from the Chancellor of the Exchequer, Rishi Sunak. The Statement outlines a number of areas where the UK is looking to tailor the application of EU financial regulation. Of note, the UK has stated that it will not implement the EU CSDR-SD regime from February 2021:

“The Government is committed to regulation that supports and enhances the functioning of UK capital markets. It will therefore consider the future approach to the UK’s settlement discipline framework, given the importance of ensuring that regulation facilitates the settlement of market transactions in a timely manner while sustaining market liquidity and efficiency. As such, the UK will not be implementing the EU’s new settlement discipline regime, set out in the Central Securities Depositories Regulation, which is due to apply in February 2021. UK firms should instead continue to apply the existing industry-led framework. Any future legislative changes will be developed through dialogue with the financial services industry, and sufficient time will be provided to prepare for the implementation of any new future regime.”

It is important to note, however, that UK trading entities, along with all third country trading entities, are still expected to be brought into scope of the EU CSDR through contractual arrangements with respect to transactions intended to be settled on EU (I)CSDs.



17 June 2020: ESMA Survey on Topics for the CSDR Review
Following a request from the European Commission, ESMA is conducting a review of CSDR. ESMA is looking to garner information from national competent authorities (NCAs), relevant authorities (RAs), the EBA, and a limited number of relevant trade associations (including ICMA). The Survey covers all of CSDR, but importantly includes Article 7 (Settlement Discipline). This provides an opportunity for respondents to submit suggested amendments to the original regulation, along with justification, including evidence and data. The deadline for responses is July 10.



10 June 2020: Overview of the CSDR Mandatory Buy-in framework, related implementation challenges; ICMA’s extensive work to support implementation in the non-cleared bond and repo markets; and the expected impacts for the European bond and repo markets



21 May 2020: ICMA has published a briefing note outlining the identified deficiencies in the CSDR provisions for cash compensation in the case of bond markets, as well highlighting some of the potential market solutions under discussion, including the not insignificant challenges associated with these. The note was produced in conjunction with the ICMA’s dedicated CSDR Cash Compensation Workstream, part of ICMA’s CSDR-SD Working Group.



20 May 2020: ICMA has submitted a letter to the European Commission and ESMA outlining the industry concerns related to timely implementation of the CSDR mandatory buy-in provisions. The letter highlights the ongoing lack of regulatory clarification required by the industry to facilitate successful implementation, as well as asking the authorities to review the design and application of the buy-in framework in light of recent market events.



8 May 2020: The European Commission has approved the revised date on which the CSDR Settlement Discipline package, including both cash penalties and mandatory buy-ins, will come into force. This will now be 1 February 2021.  ESMA had proposed the short technical postponement (from 13 September 2020) primarily to allow for a messaging roll-out to support the implementation of cash penalties in the T2S system.



April 2020: Steven Maijoor, Chair of ESMA, responds to cross-industry letter of January 22 to the European Commission and ESMA highlighting concerns related to the implementation of the CSDR mandatory buy-in regime.



March 2020:  Updated overview of CSDR-SD provisions and ICMA’s work to support implementation in the international bond and repo markets.



5 March 2020: ICMA has published FAQs on CSDR mandatory buy-ins and Securities Financing Transactions. The FAQs are intended to outline considerations and, where possible, to provide clarity with respect to the application of CSDR buy-ins in the case of repos and other SFTs. The FAQs will be updated in light of new guidance from ESMA and agreed market best practice.



4 February 2020 ESMA has published a Final Report providing official confirmation of the expected delay to the implementation of the CSDR Settlement Discipline measures, including cash penalties and mandatory buy-ins. As expected, this is now set to go live on 1 February 2021. In the Final Report, ESMA outlines the technical reasons for the short delay,  which essentially relate to the timing of the ISO messaging update required to support the implementation of the penalty mechanism in T2S. The additional time required for CSDs to update their processes, and for firms to revise their practices and contractual arrangements, are also cited. It should be noted, however, that the delay is subject to endorsement by the European Commission and a non-objection period of the European Parliament and the Council (although this is expected to be a formality).

This limited technical postponement should not be conflated with the more material delay being requested by the industry in order for the authorities to undertake a robust market impact analysis of the mandatory buy-in provisions.



30 January 2020 ICMA's AMIC and the IA have written to Executive Vice-President Dombrovskis of the European Commission, on behalf of their members, expressing concerns about the potential bond market impacts of the CSDR mandatory buy-in provisions (due to come into force in early 2021). The regulatory initiative is widely expected to have negative implications for European bond market efficiency, liquidity, and stability, creating additional, and largely unwarranted risks for investors. Representing European and global buy-side institutions, the Asset Management and Investors Council and the Investment Association encourage the European Commission to undertake a robust market impact assessment of the mandatory buy-in provisions before attempting implementation. In the absence of such an analysis, as a minimum, the associations request a cautious, phased-in approach to minimize potential disruption to the European markets.   



23 January 2020 Along with 13 other industry bodies, ICMA has co-signed a cross-industry letter to the European Commission outlining concerns related to the implementation of the CSDR mandatory buy-in regime. While fully supporting the goal of improved settlement discipline in the EU, the associations request that the mandatory nature of the buy-in be amended to become an optional right of the receiving trading party, underpinned by law, to allow a buy-in of a non-delivering counterparty.



27 November 2019 The results of a survey of ICMA members, representing buy-side firms, sell-side firms and repo and securities lending desks, show that the new mandatory buy-in regime, to be introduced in 2020, will negatively impact bond market liquidity and efficiency. The new measure will force a change in the behaviour of market makers, who are the principal providers of liquidity in bond markets, affecting pricing across a broad range of fixed income asset classes as well as their willingness to show offers. This effect will be felt most at the lower end of the credit spectrum, for example corporate bonds.











14 November 2019 Press release: ICMA to update its buy-in rules to support implementation of EU CSDR mandatory buy-in provisions



10 October 2019 Article: CSDR settlement discipline: mandatory buy-ins



30 September 2019 ICMA has today launched its CSDR buy-in impact study for bond markets. Following its 2015 bond market impact study, ICMA is conducting a more granular study to ascertain market awareness, preparedness, concerns, and expected impacts on bond market pricing and liquidity. The new study uses three separate online surveys, targeted at:

  1. Sell-side trading desks
  2. Repo and securities lending desks
  3. Buy-side trading desks
As with the 2015 survey, the sell-side survey asks respondents to estimate their expected pricing adjustment for offer-side liquidity across a range of euro denominated bond asset classes (based on a ‘typical’ 5-year duration bond). As the 2015 study highlighted, the ability to quantify (and cost) the impacts of regulatory initiatives provides the most powerful basis for any request for recalibration.

The deadline for responses is 18 October 2019.

The results of the impact study will be published in a publicly available report (projected for late October). The objective of the report will be to provide useful market intelligence as firms finalise their preparations and develop business strategies for implementation in late 2020, to underpin ICMA’s ongoing advocacy work related to Level 3 guidance, and to inform ICMA’s review of its buy-in rules to support implementation and provide market best practice.



August 2019 ICMA has published an update to the information brochure on CSD Regulation mandatory buy-ins, outlining the scope and regulatory requirements (originally published July 2018).















11 July 2019 Article: Implementing CSDR mandatory buy-ins



3 October 2018 Today ICMA published a discussion paper on CSDR mandatory buy-ins and securities financing transactions. The paper is intended to complement ICMA’s previous work on the topic of CSDR Settlement Discipline, due to come into force in September 2020, and focuses more specifically on the implementation challenges for in-scope repo and securities lending markets.

Currently, SFTs have their own contractual provisions in the event of a settlement fail, laid out in the relevant GMRAs and GMSLAs. Buy-ins, as utilized in the outright cash markets, generally do not apply to SFTs. However, under the new regulation, SFTs with terms of 30 business-days or longer will be in scope of the mandatory buy-in provisions. This creates a number of complications and ambiguities which the paper seeks to explore and discuss. In doing so, it also intends to lay  the ground-work for constructive dialogue between market participants and the regulatory authorities to resolve the various challenges and support successful implementation, with minimal disruption to market functioning and liquidity.




2 October 2018 Andy Hill's webinar presented an overview of the CSDR mandatory buy-in provisions and contrast these with more conventional processes. It also explored the likely implications for market risk and potential adverse behavioural incentives for European bond and repo market participants. Topics covered included: CSDR Settlement Discipline & mandatory buy-ins; conventional buy-ins vs CSDR mandatory buy-ins; the CSDR mandatory buy-in asymmetry; potential risks and adverse behavioural impacts of CSDR mandatory buy-ins; challenges of applying CSDR mandatory buy-ins to SFTs; and what ICMA is doing with respect to CSDR-SD.

Download the slides
View the webinar






13 September 2018 The regulatory technical standards (RTS) for settlement discipline under CSDR have been published in the Official Journal of the EU.  The RTS, including all mandatory buy-in requirements, will start applying after a 24-month period, in September 2020.



26 June 2018 ICMA discussion paper on the potential market consequences of one of the provisions of the Central Securities Depository Regulation (CSDR), entitled: ‘How to survive in a mandatory buy-in world’ seeks to explain the additional market risks and economic uncertainties the CSDR buy-in regime will create for bond market participants, both buyers and sellers, as well as intermediaries and lenders of securities. It explores the adverse and often conflicting behavioural incentives which will face market participants as they try to minimise these risks and the potential to incur losses beyond their control.

The ‘tips’ provided are not ICMA recommendations – they are intended to highlight the unintended consequences of the regulation.








May 2018 ICMA has published a briefing note on the RTS for CSDR-SD related to the mandatory buy-in regime. The note outlines the key characteristics of the mandatory buy-in framework, and discusses the expected impacts this is likely to have with respect to bond market liquidity, repo and lending markets, increased risks to buy-sides, market stability, potential extraterritorial implications, as well as conflicts with the aims of CMU. It also references the original marker impact study undertaken by ICMA in 2015, which suggests significant costs to buy-side firms, (running into €10s of billions per annum) through adjusted bond market pricing and reduced liquidity.



25 May 2018
The European Commission has published the regulatory technical standards (RTS) for CSDR Settlement Discipline, including mandatory buy-ins, following ESMA’s submission of the draft RTS in February 2016.

The European Parliament and Council will have three months to scrutinize the RTS, after which it will be published in the Official Journal. The CSDR-SD package will come into force 24 months after it is published in the OJ, expected to be September 2020.



November 2017 The European Commission’s Expert Group on Corporate Bond Markets recommends that the implementation of the proposed CSDR mandatory buy-in regime be delayed in order to review its provisions. The recommendation is one of 22 put forward by the industry group in its report, Improving European Corporate Bond Markets, intended to improve the efficiency and functioning of the European corporate bond markets. The potential risks to market stability stemming from the mandatory buy-in provisions are discussed further in the Expert Group’s accompanying report, Analysis of European Corporate Bond Markets.

According to the Expert Group’s headline report:

“Currently, the regulation on settlement and central securities depositories (CSDR) requires market participants having failed to receive a security to initiate a buy-in process. This creates risks for liquidity providers, investors and securities lenders, and has a negative impact on market efficiency and stability. Therefore, the timing for the implementation of CSDR mandatory buy-ins should be carefully managed to cushion its impact and provide space to review the provisions before they have unintended and potentially irreversible consequences.”

As of January 2018 the European Commission was still reviewing the draft RTS for CSDR mandatory buy-ins (published in February 2016 – see below). ESMA has proposed a 24 month implementation period once the RTS is finally passed into law.



May 2017 ICMA publishes a Position Paper on CSDR Settlement Discipline. The paper was prepared in close consultation with the SMPC CSDR/Buy-in Working Group, as well as with the SMPC, ERCC, and AMIC. Essentially, ICMA proposes that the cash penalties for bonds should be increased when implemented in 2019, while mandatory buy-ins should not be implemented.

ICMA’s position can be summarized as:
The Position Paper can be downloaded here.



March 10 2017
A package of regulatory technical standards (RTS) for CSDR was published in the Official Journal of the European Union. This included the RTS for the parameters for the calculation of cash penalties for settlement fails and the operations of CSDs [central securities depositories] in host Member States. The specific RTS relating to cash penalties can be found here.

The regulatory initiative is a key component of CSDR’s framework for Settlement Discipline, as outlined in Article 7 of the 2014 CSDR, alongside the requirement for CSDs and CCPs to monitor and report participants that consistently systematically fail transactions (‘name and shame’), and a mandatory buy-in regime. The objective of the cash penalties regime is to create a standardized, harmonized penalty regime across the EU to be applied in the event of settlement fails.

The full CSDR Settlement Discipline package (including cash penalties and mandatory buy-ins) is expected to be implemented no earlier than June 2019.

An ICMA briefing note outlining the background, details, and potential impacts of the cash penalty regime can be found here.



March 2017
ICMA writes to Olivier Guersent (Director General of DG-FISMA) and Steven Maijoor (Chair of ESMA) informing them of changes to the ICMA ‘buy-in rules’. In light of the consultation that precipitated and informed the update to the ICMA secondary market rules and recommendations buy-in procedure, ICMA also highlights to the Commission and ESMA its concerns with respect to the projected implementation of the mandatory buy-in regime under CSDR.

Letter to Olivier Guersent
Letter to Steven Maijoor



March 2016
ICMA publishes a paper illustrating the problems arising from an asymmetry in the proposed CSDR mandatory buy-in process that only allows for the settlement of the buy-in or cash compensation price differential to be paid in one direction. Conventional buy-in processes, such as under ICMA Rules, allow for the payment of the buy-in differential to be paid in either direction between the buyer and seller, depending on whether the buy-in price is higher or lower than the original trade price. This ensures an equitable remedy, with neither the buyer or seller incurring an undue profit or loss as a result of the buy-in. The CSDR buy-in process, however, only allows for the payment to be made by the seller to the buyer in the event that the buy-in price (or cash compensation reference price) is higher than the original trade price. From a risk perspective, this asymmetry is the equivalent of any seller of securities also writing a free at-the-money put option which will become active in the event of a buy-in. Conversely, any purchaser of securities will be long this free option.

ICMA is hopeful that ESMA and the European Commission will address this highly technical, but fundamental, anomaly before attempting implementation of the mandatory buy-in regime, currently projected for early 2019.

CSDR Mandatory Buy-ins: An illustration of the problems arising from the asymmetric treatment of the payment of the buy-in or cash compensation differential



Since the publication of the Level 1 draft text of CSDR Regulation, ICMA has been highly engaged in cross-industry advocacy related to the Regulation’s provisions for settlement discipline, in particular mandatory buy-ins, which is broadly recognised as having a potentially detrimental impact on European bond and repo market liquidity and efficiency.



1 February 2016 ESMA published the long-awaited draft RTS for mandatory buy-ins. Given the restrictions of the Level 1 text, and the concerns raised by earlier draft RTS, the final draft RTS attempt to strike a balance between consistency with the intent of the Regulation and minimizing the potential for unintended adverse impacts to European capital markets.

Accordingly, EMSA has proposed what is essentially a trading level buy-in process, and so limiting (though not fully negating) risks to CSD participants (essentially custodian and agent banks). Furthermore, within the restrictions of the Regulation, ESMA proposes the longest possible extension period (i.e. the duration of the fail before a buy-in is initiated) of seven business days for all fixed income securities. With respect to securities financing transactions, which, are also brought in scope of the Regulation, ESMA proposes an exemption for any SFTs with a term of less than 30 business days. This exemption appears to apply to both start- and end-legs.

There remains an issue relating to an asymmetric treatment of the payment of the differential between the buy-in or cash compensation reference price and the original trade price, which ICMA will continue to discuss with the authorities.

The Final Report and draft RTS can be found here.
 
Click here for an overview of the draft RTS.



6 August 2015
ICMA has submitted its response to the ESMA Consultation Paper for Regulatory Technical Standards on the CSD Regulation related to the Operation of the Buy-in Process. ICMA has consistently advocated against a mandatory buy-in regime, which is broadly recognized as being detrimental to European bond and repo market stability, efficiency, and liquidity, as well as creating significant risks and costs for investors, trading counterparties, settlement agents, and settlement systems themselves.

The purpose of this ESMA Consultation Paper is to seek stakeholder input on the technical standards (the ‘Level 2’) for the process of the buy-in under the mandatory regime. In its response, ICMA has gone to great lengths to argue that any buy-in process, if implemented, should only be at the trading counterparty level, and not at the CSD participant level. This is wholly in line with the market-wide consensus. However, even with a trading level process, ICMA carefully outlines the challenges, risks, and inconsistencies, many of which are the direct result of the widely recognized flaws in the Level 1 Regulation. Furthermore, ICMA uses this response as another opportunity to recommend a practical delay in the implementation of the regime, ideally until post T2S (2018).

To view the response, click here.



Buy-ins, how they work, and the challenge of CSDR
An ICMA briefing note


July 2015 As ICMA prepared its response to the ESMA Consultation Paper on the CSDR regulatory technical standards related to the operation of buy-in, it published a Briefing Note on the buy-in process. The paper illustrates how buy-ins work currently, and how they are proposed to work under CSDR. While CSDR does not define what a buy-in is, or what it is intended to do, it does provide for who should be responsible for, and be affected by, a buy-in, as well as the related cash-flows.

To view the briefing note, click here.



ICMA publishes CSDR Mandatory Buy-in Impact Study

24 February 2015 The inclusion of a mandatory buy-in regime in CSD Regulation has been highly contentious, and many market participants question whether it can improve settlement efficiency. The ICMA study illustrates that if, or when, mandatory buy-in regulation is implemented (scheduled for early 2016), liquidity across secondary European bond and financing markets will reduce significantly, while bid-offer spreads will widen dramatically. The results suggest that even the most liquid sovereign bonds will see bid-offer spreads double, while secondary markets in less liquid corporate bonds may effectively close. The survey further suggests that for many less liquid bonds, including sovereign and public issues, market-makers will retrench from providing liquidity altogether.

The study also highlights the potential costs of these impacts, that will be borne by investors and issuers (public and private), and so constitute a cost to the real economy.

To view the study, click here.



19 February 2015 ICMA has submitted its formal response to the ESMA Consultation Papers on Technical Standards and Technical Advice under the CSD Regulation. ICMA’s response focuses primarily on Settlement Discipline, which will have the most direct impact on the functioning and efficiency of the European capital markets. Of particular concern to ICMA’s members is the provision for Mandatory Buy-ins. In responding to the various questions, ICMA provides a number of recommendations to support the successful implementation of Settlement Discipline measures, as well as suggested enhancements to the draft technical standards.

To view the response, click here.



26 November 2014 The ICMA ERC* and SMPC co-sign with AFME a letter to ESMA outlining potential models for a settlement discipline regime (‘cash penalties for fails’) under CSDR.

To view the letter, click here.

*On 4 December 2015, the name of the European Repo Council (ERC) was changed to the European Repo and Collateral Council (ERCC).



See also:
CSD Regulation: Migration to T+2



Contacts:

Andy Hill
Senior Director, Market Practice and Regulatory Policy; secretary to the Secondary Market Practices Committee and also responsible for overseeing repo policy.
Direct line: +44 20 7213 0335

Gabriel Callsen
Director, Market Practice and Regulatory Policy
Direct line: +44 20 7213 0334