ICMA does not believe that without changes to the Level 1 Regulation any of the options can be successfully implemented.
Regardless of which option ESMA chooses to recommend, it is essential that ESMA provide clarity on the following issues in the Level 2 RTS related to the buy-in process:
- The definition of the buy-in and its purpose with respect to a financial transaction.
- The scope of the buy-in process, in terms of the different entities (trading level, settlement level, and other), transaction types (such as posting margin, portfolio transfers, or account realignments), and extraterritoriality, as well as the case where the settlement fail is caused by the purchasing (receiving) counterparty due to insufficient funds.
- The direction of payment of the price differential between the buy-in price and the original transaction price between trading counterparties (or settlement participants, if/where relevant) in the case where:
(i) the buy-in price is higher than the original transaction price; and
(ii) the buy-in price is lower than the original transaction price.
Defining buy-in execution as a discrete event would allow the delivery of securities by the failing counterparty beyond the end of the extension period, up until the buy-in execution, thus helping to reduce the number of buy-ins. This would also better enable the trading parties to manage the market risks arising out of the buy-in (and cash compensation) process.
- The determination for the exemption cut-off point for the first-leg of termed securities financing transactions not only allow for the appropriate extension period and buy-in timeframe of the underlying security, but also the possibility for deferral of the buy-in.
- Clarity on scope of buy-ins in terms of (i) treatment of transfers between CSD accounts which do not represent an underlying trade; and (ii) the exemption in Article 7(13) in CSDR related to the principal trading venue being in a third country.
- A centralized mechanism be established to hear and resolve buy-in (and cash compensation) related disputes.
Full response
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