In a recent article, Lucy Frost, for International Financial Law Review, explored the delay to the introduction of mandatory buy-ins relating to the Central Securities Depositories Regulation (CSDR). Lucy interviewed a range of industry experts, including Coremont Chief Compliance Officer and Partner, Michelle Bedwin.
Michelle commented: “There’s no doubt the industry breathed a collective sigh of relief at this output from ESMA.”
However, together with other commentators, she cautioned: “This delay gives the European Commission and co-legislators more time to finetune and ratify the rules. However, it remains to be seen what exactly the three-year delay to the regime will bring. It’s clear that key stakeholders are focused on determining the best way forward to improve settlement efficiency.”
Please see the full article on IFLR’s website and brief FAQs on the subject below.
What is a buy-in?
A buy-in is a tool to manage settlement risk. If a settlement fails, a buy-in gives the buyer of securities the contractual right to purchase the securities from another source, as well as cancelling the original trade, and then to settle any differences between the original counterparties. Interestingly, if the buy-in is executed at a lower price compared to the original transaction, this could mean the defaulting seller receives payment.
However, issues such as the “buy-in premium” (where the difference between the buy-in price and the current market price at the time of the buy-in is factored in), and the fact that buy-ins are usually executed for guaranteed delivery, often mean that participating in a buy-in can be an expensive experience.
Why is this issue causing pushback?
The European Securities and Market Authority recently announced an extra three-year delay to the application of the Central Securities Depositories Regulation mandatory buy-in regime.
This controversial issue has drawn critique since it was first mooted back in 2014, while its inclusion in the final regulation caused equal parts astonishment and consternation.
Market commentators are concerned that the proposed rules will change secondary market structure and behaviour, as well as how liquidity is provided within the EU, especially for securities such as corporate bonds, SME securities, and emerging markets, which are less liquid. Other experts have raised the possibility of reduced liquidity and increased market instability, in addition to increased costs and market risks for many participants.