Quick Find:
CSDR settlement discipline
While CSDR deals mainly with the regulation of Europe’s settlement systems, it contains a section on ‘settlement discipline’, which includes measures to improve settlement efficiency, such as cash penalties for fails. Among these is the provision for mandatory buy-ins. In the series of papers we look in detail at the new mandatory buy-in regime, outlining its scope and regulatory requirements. The CSDR buy-in provisions are expected to come into force in September 2020 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

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


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