The requirement to appoint a buy-in agent under the Central Securities Depositories Regulation (CSDR) mandatory buy-in framework is “potentially extremely problematic”, according to the International Capital Markets Association (ICMA).
In a briefing note, ICMA outlined that as part of the broader review of the CSDR mandatory buy-in framework, the requirement to appoint a buy-in agent should be removed.
The briefing note looks at the traditional role of buy-in agents in the European non-cleared bond markets and why buy-in agents are no longer required in the case of the ICMA Buy-in Rules, and the risks and implications arising from a lack of availability of buy-in agents for the purposes of the CSDR regime.
ICMA said it has questioned the need for, and design of, the EU CSDR mandatory buy-in regime since it entered into law in 2014.
The association has highlighted cross-industry concerns that not only is it “likely to be damaging to bond market liquidity, efficiency, and stability, but many requirements of the regulation potentially render the initiative unimplementable”.
ICMA maintains its position that other measures to improve settlement efficiency, such as cash penalties, should be implemented, and possibly recalibrated as appropriate.
Meanwhile, ICMA suggested the need for and design of the buy-in mechanism should be reviewed in the light of a rigorous market impact assessment as well as with reference to existing, market-based buy-in arrangements.
It explained that traditionally, buy-in agents were market-makers for the relevant securities, who were able to apply their product knowledge and experience and leverage their client franchise in order to fulfil the buy-in.
“Under CSDR these risks are likely to be even greater”, ICMA warned.
“While there is still time for more solutions to put themselves forward, the fear is that they do not and that by the time the mandatory buy-in provisions come into force, most buy-ins will not be successfully executed”, the association highlighted.
According to the association, this could result in a mandatory cash settlement mechanism that may also prove to be problematic, if not unimplementable.
ICMA concluded: “If mandatory buy-ins are to remain part of the CSDR-SD package, following the long-needed review, it would seem to be important that not only is there the possibility to appoint a far broader range of actors as buy-in agents (in particular established liquidity providers), but the requirement to appoint a buy-in agent to be removed altogether, and that, subject to best execution requirements and clearly defined limitations on conflicts of interest, firms are able to execute their own buy-ins.”
“However, the optimal solution remains that firms be able to execute buy-ins at their own discretion under market-based contractual arrangements, rather than being mandated by overly-prescriptive and potentially unimplementable legislation that fails to reflect underlying market structures and dynamics,” ICMA added.
To read the full briefing note, click here.
