Secondary Markets
by Andy Hill, Elizabeth Callaghan, Gabriel Callsen and Rowan Varrall
CSDR mandatory buy-ins Background The implementation of the Settlement Discipline provisions of the CSD Regulation (CSDR-SD), in particular the mandatory buy-in (MBI) regime, remain a priority issue for ICMA’s members, both buy-side and sell-side, active in the European bond and securities financing markets. Members’ concerns include preparedness for compliance, practical challenges related to implementation, and the expected adverse impacts for market pricing and liquidity. ICMA is focused on addressing all of these concerns. ICMA’s work related to CSDR-SD is coordinated through the dedicated CSDR-SD Working Group (consisting of fixed income and repo traders, operations experts, as well as compliance officers), under the umbrella of the Secondary Market Practices Committee, and also through the CSDR Legal Workstream, which is a sub-group of the ERCC Legal Working Group (primarily lawyers). CSDR-SD, including cash penalties for fails and mandatory buy-ins, is currently expected to go live on 1 February 2021.
Supporting implementation ICMA is looking to support compliance and implementation for its members through revising the ICMA Buy-in Rules. (ICMA is also looking to support compliance and implementation with respect to the repo market by developing a CSDR-SD Annex for the GMRA – see Repo and Collateral section.) The ICMA Buy-in Rules (part of the ICMA Secondary Market Rules & Recommendations) are a longstanding contractual buy-in framework relied upon widely in the international
45 | ISSUE 58 | Third Quarter 2020 | icmagroup.org
cross-border bond markets. They apply between ICMA members and/or are applied between members and non-members, or non-members and non-members, via incorporation by reference in their terms of business. It is intended that the Buy-in Rules be revised ahead of SD go live to provide members and other industry users with: (a) a contractual buy-in framework that can be initiated in the event of a settlement fail and completed before the CSDR MBI is required; and (b) a contractual framework to help support execution of the MBI process in the event that this is required.
PEP Buy-in The Rules that apply during the extension period (the time between the original intended settlement date of the transaction and when the MBI process is required) have been dubbed “the pre-extension period” (or “PEP”) buy-in. This is expected to retain the features of the existing ICMA Rules, including symmetrical differential payments, a passon mechanism, no requirement to appoint a buy-in agent, guaranteed delivery, and the ability for parties to negotiate cash settlement – albeit within a much more condensed timeframe.
CSDR Buy-in The Rules that apply after the extension period (where the transaction is in scope of CSDR-SD) will align with the provisions outlined in the Regulation. To the extent that it is possible, the intention is also to provide additional contractual features to help address many of the risks and anomalies arising from the Regulation, in particular symmetrical differential payments and a pass-on
