The International Capital Market Association (ICMA) has pledged to continue lobbying efforts to achieve meaningful revisions to the settlement discipline of the Central Securities Depositories Regulation (CSDR) despite EU regulators’ latest dismissal of its concerns.
The trade body’s senior director for market practice and regulatory policy, Andrew Hill, tells SLT: “ICMA will remain committed to advocating for constructive revisions to the settlement discipline package; partly because our members demand it, but also in line with our mission to promote resilient and well-functioning international debt capital markets.”
Moreover, Hill argues that the disruption to businesses caused by the COVID-19 pandemic coupled with lingering ambiguities around certain requirements of the regime means “it is unrealistic to think that the market will be anywhere near ready for implementation of the buy-in regime by February 2021”.
The story so far
CSDR’s settlement discipline regime aims to reduce settlement fails in a variety of markets by imposing mandatory buy-ins and cash penalties for failed trades.
In January, a joint letter was sent to the chair of the European Securities and Markets Authority (ESMA), Steven Maijoor, by a large group of industry bodies, including ICMA, which outlined several areas of concern relating to CSDR’s settlement discipline regime.
The group explained that the rules framework was not fit for purpose and had the potential to radically damage market liquidity and, by proxy, stability. Several areas of ambiguity yet to be clarified by the European Commission also meant that firms were highly unlikely to be able to meet original September deadline.
In February, ESMA responded by recommending to the commission that the regime be pushed back to February 2021, to allow for vital technical amendments to be made. The new timetable is now awaiting approval by the commission and is widely expected to be accepted.
Last week, Maijoor personally responded to the letter and made clear that industry stakeholders can expect no further leniency on the matter.
In his written response, seen by SLT, Maijoor says that the entry into force of the settlement discipline regime has already been delayed by two years from the publication of the regulatory technical standards (RTS), in addition to the latest push back. The implication being that enough is enough and firms should have their houses in order by now.
Highlighting a suggestion made in the January letter that the buy-in rule should be made mandatory to avoid an asymmetrical market dynamic that could unfairly penalise the failing party, Maijoor countered that the evidence the associations had referenced was not enough to sway regulators at this time.
“In our view, it is premature to consider further action at this point in time, in the absence of concrete evidence following the implementation of the buy-in requirements,” Maijoor writes. “ESMA is committed to monitoring the situation and will assess the need for any further action following the implementation of the settlement discipline regime.”
Finally, in response to the claim that the RTS contained several ambiguities that made it impossible for firms to build their solutions with the confidence they have correctly interpreted the scope of the regulation, Maijoor explains that further clarification is being drafted.
He writes: “On the other various issues raised in your letter concerning the buy-in, such as the pass-on mechanism, the asymmetry of buy-in costs and the topic of cash compensation, discussions at expert level are ongoing, with a view to clarifying the respective matters through supervisory convergence measures when needed.”
The latest move
Reacting to the chair’s letter, Hill says: “We are naturally disappointed with the regulators’ response to the industry’s ask, but not surprised. The seeds to this problem were sown by the European Parliament back in 2013, and rolling this back is a legislative challenge, no matter how bad an idea or how damaging we all think it might be.
Hill explains that ICMA is being actively encouraged to not give up its lobbying effort most enthusiastically by its buy-side membership, which is the very demographic CSDR is aimed to protect.
“Unfortunately, the notion of mandatory buy-ins for non-cleared markets was conceived in a vacuum, he explains. “While nobody doubts the good intentions underlying it, the fact remains that the investors it is intended to protect were never consulted, and now they are the ones who are going to suffer most.”
“We remain supportive of settlement discipline and measures to improve settlement efficiency. We have always maintained that a suitably calibrated cash penalty mechanism could help to that end.
“However, we remain deeply sceptical of a mandatory buy-in regime, which we believe will do more harm than good.”
Hill says the association will continue to make the arguments outlined in the January letter but adds that the recent COVID-19 fuelled market turmoil act as a good case study of just how damaging a mandatory buy-in regime could be.
At the height of last month’s volatility, The number of settlement fails spiked at the same time as market liquidity evaporated. If CSDR’s rules had been in play, many failing parties would have found themselves forced to absorb heavy losses to make their counterpart whole, in a scenario that would have left both entities out of pocket.
Hill says: “The recent market turmoil should give regulators cause to consider the fragility of liquidity in stressed markets and to ask whether further measures to reduce market liquidity will be counterproductive.”
“The recent crisis aside, settlement efficiency rates in Europe are around 96-98 percent, depending on the underlying asset class,” he adds. “We would all like to move that into the 99-100 percent range, and measures such as cash penalties could help get us there. But you have to ask whether the costs to market efficiency and liquidity resulting from a mandatory buy-in regime justify the incremental improvement we are working towards.”
Moreover, the coronavirus factor has also scuppered the timetables of business and regulators alike with several regulatory frameworks pushed back to allow firms to make up for lost time during country lockdowns.
Hill suggests that CSDR may fall foul of this same problem, regardless of firm comments made today by ESMA or elsewhere.
SLT understands that other associations that were signatories of the January letter are also planning further lobby activities and the group remains in regular contact on the matter but no joint activates are currently underway.
