European Council and Parliament reach agreement on CSDR Refit
28 June 2023 On 27 June, the European Council and Parliament reached a provisional interinstitutional agreement on the CSDR Refit. A critical element of the Refit is the revised settlement efficiency regime, in particular the highly controversial application of the mandatory buy-ins in the event of settlement fails. ICMA has long opposed the introduction of a mandatory buy-in (MBI) regime in the EU bond markets, and challenged their inclusion in the original CSD Regulation, pointing to the risks to market liquidity and stability, and noting that existing, contractual buy-ins already provided an effective and well-designed tool for managing settlement risk. Despite being passed into law in 2014, mandatory buy-ins have never been implemented.
While ICMA and the broader industry saw the CSDR Refit as an opportunity to remove the MBI framework from EU law, in the initial proposal published in March 2022 the European Commission decided to keep the regime as a “last resort” in the event that the cash penalty mechanism, introduced in February 2022, did not result in improving settlement efficiency rates for certain financial instruments. The Commission further suggested some enhancements to the mandatory buy-in process, which are more in line with existing contractual buy-ins, such as symmetrical payments of the buy-in price differential (thereby preserving the economics of the original trade) and the possibility for a pass-on mechanism (allowing for the settlement of multiple linked fails by means of a single buy-in).
During the subsequent legislative process to finalise the text, ICMA engaged with the co-legislators to ensure that MBIs are genuinely a last resort measure subject to appropriate conditions and to address a number of more technical issues with the initial proposal related to the application of buy-ins as well as the buy-in mechanism.
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.
While ICMA and the industry more broadly would have preferred that mandatory buy-ins were removed from EU regulation completely, ICMA welcomes their de-prioritisation as a settlement discipline mechanism. ICMA will continue to work with its members and market authorities to improve settlement efficiency in international bond and repo markets, helping to underpin effective and stable financial markets.
ICMA looks forward to providing more commentary once the final technical discussions are concluded and the final draft is published.
