While EU CSD Regulation (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, primarily cash penalties for fails, as well as mandatory buy-in requirement. Cash penalties went live in the EU on 1 February 2022, while the mandatory buy-in provisions were suspended pending revision in the 2022-23 CSDR Refit.
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’s longstanding focus on this issue has been critical in ensuring the suspension and review of mandatory buy-ins, resulting in the “two-step approach” to implementation, meaning that it will essentially be a regulatory remedy of last resort.
Meanwhile, ICMA continues to support the successful implementation of CSDR penalties, providing FAQs and market best practice, through best practice recommendations to support settlement efficiency in the bond and repo markets, as well as providing a contractual framework to facilitate discretionary buy-ins.
See also: CSDR-SD Working Group and Best practice recommendations to support settlement efficiency in the secondary bond markets
9 September 2024: ICMA responds to ESMA's consultation on the scope of CSDR settlement discipline
ICMA has today submitted a response to ESMA’s consultation paper on Technical Advice on the Scope of CSDR Settlement Discipline. The consultation sought stakeholder views on two specific exemptions from settlement discipline measures that are set out in the CSDR Refit article 7(9) and which ESMA has been asked to further specify, namely i) settlement fails that are considered as not attributable to the participants in the transaction, and ii) operations that are not considered as trading.
11 March 2024: ICMA publishes briefing note on the ESMA proposals for CSDR penalties
ICMA has published a briefing note on the ESMA proposals for CSDR penalties. The briefing note is in response to ESMA proposals to increase the penalty rates for settlement fails, as applied under the EU CSDR, from current levels by a factor of many multiples. ESMA also floats the concept of “progressive penalties” that increase each subsequent day of the fail.
ICMA analyses the proposals in the context of the causes of settlement fails, the “natural cost” of failing, and behavioural incentives for timely settlement. ICMA concludes that the proposals put forward by ESMA are not only disproportionate, but are unjustified, pointing to the significant improvement in settlement efficiency observed in the EU, particularly in response to a higher interest rate environment.
ICMA argues that, if implemented, the proposed penalty recalibrations would undermine the competitiveness and credibility of the EU as a global financial marketplace. Furthermore, the extreme distortions that they would bring about may incentivise adverse market behaviour, as being failed would become economically more appealing than facilitating settlement. Meanwhile, these would feed into bid-ask spreads across all bond classes, as well as adversely impairing liquidity.
ICMA points to the US Treasury Markets Practices Group penalty framework as an example of a penalty mechanism that is appropriately designed and proportionately calibrated to achieve its intended purpose – that of disincentivising poor settlement behaviour in low interest rate environments.
The briefing note follows ICMA’s formal response to the ESMA consultation on its proposals.
29 February 2024: ICMA response to the ESMA consultation on the EU CSDR Penalty Mechanism
ICMA has responded to the ESMA consultation on the EU CSDR Penalty Mechanism.
ICMA and its members welcomed the opportunity to review the EU CSDR Penalty Mechanism and to make constructive suggestions to enhance its effectiveness. However, it is disappointed that the proposals put forward in the consultation are not only disproportionate in their calibration but are unsupported by any data or analysis.
ICMA and its members support industry and regulatory efforts to improve settlement efficiency across the EU bond markets. This includes the potential of a penalty mechanism to help to address the subset of “behavioural fails” in very low interest rate environments, highlighting the strong correlation between significant improvements in settlement efficiency and short-term rates in the EU over the past two years. In its response, ICMA points to the US TMPG Penalty Framework as a proportionate and effective mechanism. ICMA’s modelling of settlement efficiency rates in the EU suggests that a longer observation period is necessary in order to identify the effectiveness of a penalty mechanism, as well as the appropriate calibration.
In the meantime, ICMA looks forward to ESMA consulting with stakeholders on other tools to improve settlement efficiency. It is here that ICMA and its members believe that a meaningful and sustainable improvement to EU settlement efficiency can be made, far beyond the relative limitations of a penalty mechanism. In addition, we would also very much welcome a renewed focus of the EU authorities on the important structural barriers to further post-trade integration and consolidation that persist in the EU, and which have been well documented since the early 2000s.
27 June 2023 European Council and Parliament reach agreement on CSDR Refit
On 27 June, the European Council and Parliament reached a provisional interinstitutional agreement on the CSDR Refit. While ICMA and the broader industry saw the CSDR Refit as an opportunity to remove the MBI framework from EU law, the provisions look set to remain, albeit as a “last resort” measure to address settlement efficiency in the EU.
While we await the finalised text, ICMA understands that the co-legislators have agreed on very strict conditions for applying mandatory buy-ins, requiring that cash penalties have been shown not to have resulted in sustaining settlement efficiency, even after considering adjusting the penalty rates, and that this also presents a risk to financial stability in the EU. As part of this process, the authorities would also be expected to consider the market impact of mandatory buy-ins as well as whether contractual remedies already exist. ICMA also expects the revised regulation to provide that ESMA look at alternative, more proportionate and targeted tools to improve settlement efficiency, such as “shaping” (splitting large trades into smaller tickets), “partialing” (the partial settlement of failing trades), as well as the use of CSD auto-borrowing and lending programs: all of which are already incorporated into ICMA’s best practice for both bond and repo trading.
October 2022: The European Parliament’s Committee on Economic and Monetary Affairs draft report on the review of the Central Securities Depository Regulation (CSDR)
ICMA welcomes the draft report from the European Parliament’s Committee on Economic and Monetary Affairs on the review of the Central Securities Depository Regulation (CSDR).
September 2022: ICMA publishes briefing note for co-legislators on its position on MBIs
ICMA has published a briefing note outlining its position on CSDR mandatory buy-ins, intended help inform the trilogue process for the CSDR Refit.
1 August 2022: ECB publishes opinion on the CSDR review proposals
The ECB has published an opinion on the CSDR review proposals released by the European Commission back in March, suggesting among other things to discard the application of the Mandatory Buy-in (MBI) provisions altogether. In case the co-legislators decide that MBIs should be maintained, the ECB opinion also includes a number of helpful suggestions to improve these provisions. In particular, the ECB recommends excluding Securities Financing Transactions (SFTs) from the scope of Mandatory Buy-ins (MBIs), in line with previous comments by ICMA.
While the ECB does not have a decision-making role in the ongoing legislative discussions in the Council and the European Parliament, the opinion is a very positive and important step which hopefully proves to be influential among co-legislators.
2 June 2022: ESMA publishes draft RTS suspending CSDR mandatory buy-ins
ESMA has published the Regulatory Technical Standards (RTS) that are intended formally to suspend the implementation of MBIs. This follows the publication in the Official Journal last week of amendment to CSDR, made as part of the DLT Pilot Regime. The RTS proposes a three year delay to the implementation of the revised MBI framework (which is still being discussed by co-legislators and is yet to be finalised).
In terms of next steps, this draft RTS is submitted to the European Commission for endorsement in the form of a Commission Delegated Regulation, after which it will be subject to scrutiny by the Parliament and Council. In the meantime, ESMA’s deprioritisation letter (or “no action letter”) will continue to apply.
26 May 2022: ICMA submits feedback for the European Commission’s proposed amendments to CSDR
ICMA has submitted its formal feedback for the European Commission’s proposed amendments to CSDR. ICMA’s members provide three main recommendations to enhance the effectiveness of the proposed revisions, along with some more technical refinements, such as amending the regulatory text to address the asymmetry in the cash compensation payment. The document also outlines some considerations for the penalty framework and application from both a secondary and primary market perspective.
16 March 2022: European Commission publishes proposals for a revised approach to mandatory buy-ins
The European Commission has proposed a ‘two-step’ approach under which mandatory buy-ins could become applicable if and when the penalties regime alone does not improve settlement fails in the EU. The eventual application of MBIs will therefore be based on an assessment by the Commission as to its appropriateness in the light of the evolution of settlement efficiency in the EU with respect to different underlying financial instruments or categories of transactions.
In the event that MBIs may eventually apply to a particular financial instrument or transaction type, the new proposal addresses a number of key issues flagged by ICMA and other industry stakeholders, including the introduction of a pass-on mechanism, symmetrical payments for the buy-in differential, and refined clarification on scope.
25 February 2022: Cash penalties: ICMA FAQs and best practices
ICMA, through its CSDR Settlement Discipline Working Group, has developed a list of Frequently Asked Questions (FAQs) and Best Practice Recommendations intended to support implementation of the CSDR Penalty regimes for the bond and repo markets, when it went live on 1 February 2022. These documents cover a range of issues, such as scope, invoicing and billing, restitution, as well as the confirmation and allocation process under Article 6 of CSDR. They are also intended to be aligned with, and complementary to, the ECSDA Penalty Framework and the AFME Best Practice for Bilateral Claims.
The ICMA FAQs and Best Practices are intended to be living documents and will be updated as new issues are raised following go-live, or in response to regulatory clarification. These also represent ICMA’s commitment to establishing best practice for international bond and repo markets as well as underpinning market resilience and efficiency.
22 December 2021: ICMA co-signs joint-association statement regarding the application of CSDR mandatory buy-ins
On 17 December 2021, ESMA issued a public statement indicating that NCAs are not expected to prioritise supervisory actions in relation to the application of the CSDR mandatory buy-in regime (MBI regime) when it comes into effect on 1 February 2022. The ESMA public statement follows agreement between the European Commission, the Council, and European Parliament at the 24 November 2021 trilogue meeting for the DLT Pilot Regime Regulation that the MBI regime should be decoupled from the CSDR Settlement Discipline package in order to delay its implementation. This is in light of the ongoing European Commission review of CSDR, with amendments to the regime and implementation timeline expected in the first half of 2022. The ESMA statement is intended to bridge the legislative gap until a new date of application has been passed into law.
Today, 22 December 2021, ICMA has co-signed a joint-association statement setting out a common interpretation of ESMA’s statement, which is that EU legislators do not expect market participants to take further action towards implementation of the mandatory buy-in requirements, including but not limited to the contractual obligations of Article 25 of RTS (EU) 2018/1229 on Settlement Discipline (CSDR RTS).
For further information, please contact andy.hill@icmagroup.org or lisa.cleary@icmagroup.org
25 November 2021: Delay to the EU CSDR mandatory buy-in regime
ICMA very much welcomes the news of the delay to the CSDR mandatory buy-in regime. ICMA has long taken the position that this regulatory initiative contained a number of critical design flaws as well as ambiguity around scope and process, not only from an implementation perspective, but also with respect to the potential implications for EU bond market liquidity and stability. ICMA looks forward to engaging further with the European Commission and ESMA as they review the role of regulatory buy-ins in the European bond markets, and how this sits with the objectives of CMU. Meanwhile, the ICMA Buy-in Rules, part of the ICMA Secondary Market Rules & Recommendations, will remain an effective and accessible contractual remedy for settlement fails in the international bond markets.
ICMA first published an impact study of mandatory buy-ins (MBI) for bond market pricing and liquidity in 2015, which first drew attention to the risks embedded in the regulation. Its 2017 position paper supported the implementation of CSDR Settlement Discipline (SD), but recommended that MBIs not be implemented; rather the provisions should be reviewed while the impact of other SD measures, such as cash penalties, be assessed. ICMA also called for the European Commission to undertake a robust impact assessment of MBIs on market functioning. In recent years, other associations, both European and global, have joined ICMA’s calls to postpone and review the EU MBI regime and in 2019, ICMA published an updated impact study, which importantly highlighted the growing concerns of investors, who would be the most adversely impacted by the regime.
23 September 2021: ESMA writes to the European Commission supporting a delay of mandatory buy-ins and asking for urgent clarification
Anneli Tuominen, interim Chair of ESMA, has written an open letter to Commissioner McGuiness, copying representatives from the European Parliament and Council, supporting a postponement of the mandatory buy-in regime and requesting urgent action to provide a signal that a modification of the current implementation timeline is considered. The letter asks for clarification of a delay, ideally, by the end of October 2021.
29 July 2021: ICMA pushes for clarification on possible postponement of mandatory buy-ins
ICMA, on behalf of its members, continues to engage with the European Commission, ESMA, EU member states, national regulators, and MEPs to press the importance of not implementing the mandatory buy-in provisions when CSDR Settlement Discipline (SD) goes live in February 2022, and the urgent need to communicate this to the industry at the earliest opportunity. It is broadly understood that not only will mandatory buy-ins (MBIs) be disproportionately damaging to EU bond market liquidity and functioning, but the current framework, largely as the result of Level 1 drafting, contains a number of critical design flaws as well as significant ambiguity around scope and process. It is therefore hoped that the other elements of CSDR-SD, including cash penalties, will go live as scheduled on 1 February 2022, but without the MBI regime, and that this will be clarified soon. As well as meeting with various regulators and policy makers, ICMA has shared widely a briefing note outlining the industry’s concerns.
15 July 2021: ICMA and other associations write to European Commission and ESMA on implementation timeline of the CSDR mandatory buy-in regime
On 14 July 2021, sixteen trade associations, representing buy-side, sell-side and market infrastructures, wrote to ESMA and the European Commission regarding the timeline for implementation of the mandatory buy-in rules as part of the CSDR Settlement Discipline Regime.
The Joint Associations welcome the Report from the Commission on the CSDR Review published in July 2021 and fully support the Commission’s intention to consider amendments to the mandatory buy-in regime, subject to an impact assessment. In light of this, the Joint Associations request ESMA and the Commission to take action to ensure that the mandatory buy-in rules for non-CCP transactions are not subject to application on 1 February 2022, when the relevant RTS is currently set to enter into force, and to provide clarity to market participants on the matter on an urgent basis.
5 July 2021: ICMA publishes CSDR-SD technology directory, focusing on cash penalties solutions for repos and cash bonds
Article 7 of Chapter III in CSD Regulation (EU) No 909/201 (CSDR) provides for measures to address settlement fails, which include cash penalties for settlement fails and mandatory buy-ins. To assist market participants prepare for CSDR implementation, ICMA has gathered technology solutions aimed at managing the requirements under CSDR Settlement Discipline. The initial focus of ICMA’s CSDR-SD technology directory is toward those solutions assisting firms in the management of cash penalties. This is intended to provide a consolidated overview on the functionalities of market solutions, such as calculation, aggregation, reconciliation, invoicing, reporting, and appeals or claims management processes. The directory also lists supported connectivity and additional services offered by providers.
The scope of the mapping may be further expanded to include solutions to facilitate the management of buy-ins, depending on regulatory developments.
Download the CSDR-SD Technology Directory here
1 July 2021: European Commission publishes report on CSDR
The European Commission has published its report following the recent Targeted Review of CSDR.
With respect to Settlement Discipline and the Mandatory Buy-in regime, the report is relatively undetailed (see section 4.4). However, it does state that it is appropriate to consider proposing certain amendments, subject to an impact assessment, to avoid potential undesired consequences. It is not yet clear whether this is enough to provide a basis for a further delay in order to avoid implementing the current RTS in February 2022, before subsequently making the much needed amendments to the MBI framework.
4 May 2021: European Commission responds to cross-association letter regarding the implementation of CSDR-SD
Mairead McGuiness, European Commissioner for Financial Stability, Financial Services and the Capital Markets Union, has responded to the joint association letter of March 11 which requested clarity on the CSDR Targeted Review and the implementation schedule of CSDR-SD.
The response confirms that at this time no decision has been made on the changes that may be proposed as part of the Commission proposal to amend CSDR. Furthermore, the Commission will only be able to determine the concrete amendments to present for adoption by the co-legislators after a thorough impact assessment according to the Better Regulation Guidelines.
1 April 2021: ICMA submits feedback on the European Commission’s Roadmap
On behalf of its wide and diverse international membership (including asset managers and investors, banks and broker-dealers, as well as market infrastructures), ICMA has submitted its feedback on the European Commission’s Roadmap for the CSDR Review. Once again, ICMA has posited that the mandatory buy-in framework, as currently drafted, requires significant revisions before attempting implementation. Furthermore, there are compelling arguments for not imposing a mandatory buy-in regime on the European bond markets, and that this could undermine market liquidity and stability. ICMA also referred to the recent letter co-signed by 15 market associations highlighting the challenges of implementing the mandatory buy-in regime while it is concurrently being reviewed and potentially revised.
11 March 2021: ICMA and other associations write to European Commission and ESMA on implementation of the CSDR Settlement Discipline Regime
ICMA and 14 trade associations1 representing a wide range of stakeholders in the European and global financial markets have written to the European Commission and ESMA raising concerns about the implementation of the mandatory buy-in requirement under the EU’s CSDR2 Settlement Discipline Regime. The current mandatory buy-in requirement, part of CSDR Settlement Discipline, which is due to come into force on 1 February 2022, is widely felt to require a thorough reassessment as to its appropriateness and is currently the subject of a European Commission Review. Any proposed legislative amendments to the mandatory buy-in requirement are not expected until the end of 2021.
Given the significant global implementation effort required to support the CSDR mandatory buy-in requirement, the associations suggest that a far more robust approach would be to make the required revisions to the mandatory buy-in regime arising from the Review before attempting implementation. Accordingly the letter asks the European Commission for clarity on the Review and implementation schedule of CSDR-SD at the earliest opportunity.
1 The contributing associations are AFME, AGC, ASSOSIM, EACB, EAPB, EBF, EDMA, EFAMA, EVIA, FIA, FIA EPTA, ICI GLOBAL, ICMA, ISDA and ISLA.
2 Regulation (EU) No 909/2014 and the Commission Delegated Regulation (EU) 2018/1229 (together, ‘CSDR’).
2 February 2021: ICMA submits its response to the Targeted consultation on the review of CSDR
ICMA’s response focuses exclusively on the section relating to Settlement Discipline, in particular the provisions relating to mandatory buy-ins, which ICMA points out is market regulation, not post-trade regulation. In its response ICMA provides data and analysis to illustrate the expected impacts of the mandatory buy-in regime on EU bond market pricing and liquidity, and the costs that will be incurred by investors and potentially issuers. The response also seeks to evidence the procyclical and destabilizing effects the regime would have had during the March-April 2020 COVID-19 market turmoil.
As well as noting extensive cross-industry work to improve settlement efficiency in the EU, ICMA recommends that the CSDR cash penalty mechanism be implemented as soon as practicable, and that the regulatory authorities monitor its impact on both settlement efficiency rates and market liquidity over an appropriate time period, then recalibrate as required. During this time, mandatory buy-ins should not be implemented. Requiring investment firms to have in place contractual arrangements to remedy settlement fails (such as those that already exist in the international bond and SFT markets), could be an effective alternative consideration.
27 January 2021: Delay to CSDR-SD to 1 February 2022 confirmed
The amending RTS delaying the coming into force of CSDR Settlement Discipline until 1 February 2022 has been published in the Official Journal.
8 December 2020: The European Commission publishes Consultation Paper on the targeted review of CSDR
The European Commission has published its long awaited Consultation Paper on the targeted review of CSDR. Importantly this also includes a section on Article 7 (Settlement Discipline) including mandatory buy-ins. ICMA’s response to the Consultation Paper will focus almost exclusively on the buy-in provisions, which are viewed by the industry to be problematic, not only from an implementation perspective, but in terms of the expected impacts on bond market efficiency, liquidity, and stability. The response is being driven by ICMA’s relevant market-facing committees, including the SMPC, ERCC, and AMIC, and is being coordinated through its dedicated CSDR-SD Working Group. The CSDR Review is seen as the last opportunity to bring about the much needed amendments to the mandatory buy-in regime before implementation is attempted in February 2022. The deadline for responses is 2 February 2021.
7 September 2020: ICMA publishes a briefing note on CSDR mandatory buy-ins and the requirement to appoint a buy-in agent
The CSDR-SD regulatory technical standards require that in the case of failing non-cleared transactions, at the start of the mandatory buy-in process the purchasing party must appoint a buy-in agent. This may not be possible, particularly since a buy-in agent may not be available (noting that the ICMA Buy-in Rules currently do not require the appointment of a buy-in for this very reason). If a buy-in agent cannot be appointed, it would seem likely that the buy-in cannot be effected, resulting in mandatory cash settlement (“cash compensation”). As ICMA has highlighted in an earlier briefing note, it is not clear how, or even if, the cash compensation provisions can be applied in the case of bonds.
View the briefing note
28 August 2020: ESMA publishes amending draft RTS delaying CSDR-SD to February 2022
ESMA has published the amending draft RTS postponing CSDR-SD to February 2022. This will still be subject to approval from the European Commission as well as a non-objection period (usually three months) for the European Parliament and Council. In the meantime, the implementation date remains February 2021.
In its final report, ESMA cites the reason for the postponement as being “the severe impact of the COVID-19 pandemic on the overall implementation of regulatory and IT projects by CSDs and their participants, as well as by other financial market infrastructures, it appears that it would be extremely difficult for these market stakeholders to comply with the requirements of the RTS on settlement discipline by 1 February 2021.”
24 August 2020: Postponement to CSDR-SD until February 2021 published in the Official Journal
The Commission Delegated Regulation (EU) 2020/1212 amending Delegated Regulation (EU) 2018/1229 to postpone the application of the CSDR settlement discipline regime until 1 February 2021 is published in the Official Journal.
28 July 2020: ESMA preparing new RTS to further postpone CSDR Settlement Discipline to 1 February 2022
ESMA has announced that it is working on a proposal to possibly delay the entry into force of the CSDR settlement discipline regime until 1 February 2022. ESMA confirms that this is due to the impact of the COVID-19 pandemic on the implementation of regulatory projects and IT deliveries by CSDs, and came as a request from the European Commission.
Of note, as well as identifying the implementation challenges being created by Covid-19, the European Commission states in its letter: Other stakeholders have also noted that market developments during this crisis would have been significantly worse in terms of available market liquidity (especially in the non-cleared bond and repo markets) if the mandatory buy-in regime was in place.
ESMA aims to publish the final report on further postponing the date of entry into force of the RTS on settlement discipline by September. Following the endorsement of the RTS by the European Commission, the Commission Delegated Regulation will then be subject to the non-objection of the European Parliament and of the Council.
10 July 2020: ICMA submits response to ESMA Survey on Topics for the CSDR Review
On behalf of its members, ICMA has submitted its response to the ESMA Survey on Topics for the CSDR Review. The ICMA response focuses on Article 7, Measures to address settlement fails, and in particular the mandatory buy-in (MBI) provisions. ICMA’s strong recommendation is ‘delay and review’. ICMA’s members feel that the MBI regime, as currently designed, would be extremely damaging for European capital market liquidity, efficiency, and stability, creating undue risks for market participants, in particular investors, and undermining the objectives of capital markets union. While pursuing other measures to promote settlement efficiency, including cash penalties, the authorities should undertake a rigorous impact assessment, firstly to conclude whether a mandatory buy-in regime is warranted, and secondly, to the extent that it is, to inform the design of any framework.
- ICMA recommends that with respect to Article 7 of CSDR, the implementation of the mandatory buy-in provisions be suspended to allow for a rigorous market impact assessment. In the meantime, the authorities should implement the other elements of the Settlement Discipline regime, including cash penalties, as soon as practicable to do so. The impacts of these measures should be monitored, and their application recalibrated as appropriate.
- ICMA further recommends that the proposed impact assessment be used firstly to conclude whether a mandatory buy-in regime is warranted, and secondly, to the extent that it is, to inform the design of any framework, noting that the current regime, as outlined in Article 7, is not fit for purpose.
- ICMA remains supportive of all constructive initiatives to improve settlement efficiency in Europe’s capital markets, whether regulatory or market-driven. These initiatives should not create undue risks for market participants, in particular investors, nor should they undermine the objective of efficient and stable European capital markets that are attractive for European and international investors and capital raisers. The CSDR mandatory buy-in framework threatens to do precisely this.
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.
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:
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
Managing Director, Head of Market Practice; Secretary to the Secondary Market Practices Committee and also responsible for overseeing repo policy; Member of the ICMA Executive Committee
Direct line: +44 20 7213 0335
