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02 February 2016

ICMA: CSDR Settlement Discipline

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ICMA commented on the RTS for CSDR, in particular mandatory buy-ins, which is broadly recognised as having a potentially detrimental impact on European bond and repo market liquidity and efficiency.

On 1 February 2016, ESMA published the draft regulatory technical standards for CSDR settlement discipline, including mandatory buy-ins.

ESMA has clearly made every effort to negate the adverse market impacts and the inherent flaws of a deeply contentious and widely opposed regulatory initiative. ESMA should be commended for pushing the interpretation and papering over the flaws of the Level 1 as far as legally possible, and for recognizing the potentially negative impacts of mandatory buy-ins on the smooth and orderly functioning of Europe’s capital markets.

However, despite the good work by ESMA, the regulation still remains highly problematic. Firstly, the RTS do not correct an explicit asymmetry in the direction of the payment of the price differential for the buy-in or cash-compensation. This creates unpredictable and unmanageable risks for liquidity providers and intermediaries and in many instances would render the buy-in process unfit for purpose. Secondly, turning buy-ins into an obligation rather than a right, particularly with a cash compensation resolution, not only creates additional risks for liquidity providers and intermediaries, but it also creates unpredictable and unmanageable risks for investors. Therefore, it remains highly questionable whether the adverse market impacts of mandatory buy-ins will justify any potential benefit.  

Ultimately, settlement inefficiencies in the European capital markets are primarily the result of fragmented and inefficient settlement systems and processes, rather than the behavior of dealers and other liquidity providers. Accordingly, fixing Europe’s back-office should be the primary focus of market and regulatory initiatives, while the implementation of mandatory buy-ins is postponed for as long as possible.

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