CSDR timebomb ticks on
09 June 2020
Despite the reprieve, firms still lack clarity on the finer details of the legal and technical requirements for achieving compliance with CSDR by February. And, the buy-in bomb still looms large
Image: alphaspirit/Shutterstock.com
Great news. The proposed delay to the Central 麻豆传媒 Depositories Regulation鈥檚 (CSDR) settlement discipline regime has been accepted by the European Commission thereby removing all but one minor legal hurdle between industry stakeholders and an additional five months to prepare their solutions. The small matter of the mandatory buy-in regime still threatens to pull the rug out from under the feet of market participants and several areas of ambiguity around the terms of what is actually required by the regulators linger, but progress is progress. Rome wasn鈥檛 built in a day.
The chair of the European 麻豆传媒 and Markets Authority (ESMA) , Steven Maijoor, appears adamant not to re-open the CSDR rulebook prior to go-live, but that additional, much-needed guidance on the areas of confusion highlighted repeatedly by the International Captial Market Association (ICMA) and others could be addressed now. So, when would that guidance need to be made avaliable by to give firms a reasonable chance of meeting next February鈥檚 deadline?
April, says ICMA鈥檚 senior director for market practice and regulatory policy, Andrew Hill, wryly.
As we drift into mid-June, with no sign of such clarifications being forthcoming, Hill says the industry now has no choice but to prepare for the worst. This means a 鈥渂are-bones implementation鈥� with all the 鈥渂ad bits鈥� and then looking to do a second wave of enhancements after go-live.
These later amendments would particularly relate to the contractual updates to mitigate the 鈥渕any risks that this regulation creates,鈥� he adds.
This missed opportunity was highlighted as one of ICMA鈥檚 many concerns around CSDR in its latest letter to the European Commission and ESMA, where it once again outlined its members鈥�, particularly the buy-side ones, 鈥渋ncreasing concerns鈥� about the fast-approaching regulation.
The trade body is hoping to follow in the footsteps of Eric Clapton, Paul McCartney and Harry Styles in successfully (re)launching its solo career by building on the success of its collaborative efforts with a K-pop rivalling mega-group of 14 associations that joined forces earlier in the year to secure the CSDR delay.
After the coordinated calls for changes, as well as a delay, were rebuffed by ESMA鈥檚 chair in his response letter in April, ICMA is this time targetting its new campaign at Patrick Pearson, head of financial markets infrastructure at the European Commission鈥檚 DG FISMA, and Fabrizio Planta, ESMA鈥檚 head of markets and data reporting department, as well as Maijoor.
This, Hill explains, is not aimed at excluding anyone but will ensure the letter lands on the desks of the people that are at the heart of decision-making on EU regulatory matters.
In the letter, written on behalf of its global membership, including banks, intermediaries, asset managers, pension funds and investment funds, among others, ICMA notes the 鈥渆xtensive discussions鈥� it has had with regulators over several years to address the most challenging aspects of the regulation.
鈥淭hese include overcoming acknowledged anomalies in the regulation, in particular the asymmetric provision for the payment of the price component of the buy-in and cash compensation differential, the absence of a pass-on mechanism (which has fundamental implications for market stability), and an ongoing lack of clarification of the transaction scope of the regulation,鈥� ICMA writes.
ICMA further states that the proposed enhancements and additional clarifications to the regulation are required by its members and the broader industry to facilitate their implementation plans.
鈥淚n the absence of guidance from the authorities on these basic threshold matters, such as scope, the market鈥檚 efforts to prepare remain severely compromised,鈥� it concludes.
The ball is now firmly back in the court of EU regulators. Hill notes that the back-and-forth may seem frustrating to outsides that have observed similar efforts by ICMA and others that failed to resonate with the powers that be, but he explains that it鈥檚 not just about being on the right side of history. ICMA鈥檚 buy-side members, despite being the ones CSDR is aimed at protecting, are genuinely concerned about how the rules framework will damage market stability. ICMA owes it to them to do its utmost to protect their interests, he states.
Fanning the flames
Elsewhere in ICMA鈥檚 latest letter, it highlights the recent market troubles sparked by the COVID-19 pandemic as providing a very unwelcome but effective real-life illustration of the 鈥渃atastrophe鈥� a mandatory buy-in provision would bring down on the EU markets during periods of turmoil.
ICMA highlights the period of volatility seen in February and March as new evidence to reinforce its claims that CSDR鈥檚 settlement discipline regime will not only fail to reduce market risk but will, in fact, bring new instability. Hill tells SLT that there are several ways the mandatory buy-in regime would have poured oil on the fire raging in several EU markets, had it been in place in recent months. This includes the fact buy-ins are massively resource-draining, demand the purchase of illiquid assets at any price, and would have pushed players out the market at the exact moment they were needed most.
ICMA notes in the final weeks of Q1, European credit secondary markets came under significant pressure as the market repriced risk and as fund managers responded to sizeable outflows. At the same time, operational infrastructure was stress-tested to its limits, as firms adjusted to working remotely against a backdrop of significantly increased volumes needing to
be processed.
Two main factors allowed the market to continue to function through this disruption, ICMA explains.
鈥淔irstly, the ability and willingness of broker-dealers to continue to make markets for their clients, and secondly a market-wide tolerance of settlement fails (which increased significantly in absolute terms),鈥� it states.
ICMA further argues that, given that a mandatory buy-in regime is designed to make settlement fails economically unviable, and will restrict market-making capacity, it is worth considering how this regime would have impacted the market鈥檚 ability to function during this crisis and the extent to which it would have added to systemic market risks and instability, thereby further amplifying the already extreme dislocations.
In closing, ICMA explains that it and its members 鈥渞emain fully committed to the implementation and objectives of the CSDR settlement discipline measures, and will continue to support initiatives, both regulatory and market-based, to improve settlement efficiency in the EU securities markets鈥�.
The chair of the European 麻豆传媒 and Markets Authority (ESMA) , Steven Maijoor, appears adamant not to re-open the CSDR rulebook prior to go-live, but that additional, much-needed guidance on the areas of confusion highlighted repeatedly by the International Captial Market Association (ICMA) and others could be addressed now. So, when would that guidance need to be made avaliable by to give firms a reasonable chance of meeting next February鈥檚 deadline?
April, says ICMA鈥檚 senior director for market practice and regulatory policy, Andrew Hill, wryly.
As we drift into mid-June, with no sign of such clarifications being forthcoming, Hill says the industry now has no choice but to prepare for the worst. This means a 鈥渂are-bones implementation鈥� with all the 鈥渂ad bits鈥� and then looking to do a second wave of enhancements after go-live.
These later amendments would particularly relate to the contractual updates to mitigate the 鈥渕any risks that this regulation creates,鈥� he adds.
This missed opportunity was highlighted as one of ICMA鈥檚 many concerns around CSDR in its latest letter to the European Commission and ESMA, where it once again outlined its members鈥�, particularly the buy-side ones, 鈥渋ncreasing concerns鈥� about the fast-approaching regulation.
The trade body is hoping to follow in the footsteps of Eric Clapton, Paul McCartney and Harry Styles in successfully (re)launching its solo career by building on the success of its collaborative efforts with a K-pop rivalling mega-group of 14 associations that joined forces earlier in the year to secure the CSDR delay.
After the coordinated calls for changes, as well as a delay, were rebuffed by ESMA鈥檚 chair in his response letter in April, ICMA is this time targetting its new campaign at Patrick Pearson, head of financial markets infrastructure at the European Commission鈥檚 DG FISMA, and Fabrizio Planta, ESMA鈥檚 head of markets and data reporting department, as well as Maijoor.
This, Hill explains, is not aimed at excluding anyone but will ensure the letter lands on the desks of the people that are at the heart of decision-making on EU regulatory matters.
In the letter, written on behalf of its global membership, including banks, intermediaries, asset managers, pension funds and investment funds, among others, ICMA notes the 鈥渆xtensive discussions鈥� it has had with regulators over several years to address the most challenging aspects of the regulation.
鈥淭hese include overcoming acknowledged anomalies in the regulation, in particular the asymmetric provision for the payment of the price component of the buy-in and cash compensation differential, the absence of a pass-on mechanism (which has fundamental implications for market stability), and an ongoing lack of clarification of the transaction scope of the regulation,鈥� ICMA writes.
ICMA further states that the proposed enhancements and additional clarifications to the regulation are required by its members and the broader industry to facilitate their implementation plans.
鈥淚n the absence of guidance from the authorities on these basic threshold matters, such as scope, the market鈥檚 efforts to prepare remain severely compromised,鈥� it concludes.
The ball is now firmly back in the court of EU regulators. Hill notes that the back-and-forth may seem frustrating to outsides that have observed similar efforts by ICMA and others that failed to resonate with the powers that be, but he explains that it鈥檚 not just about being on the right side of history. ICMA鈥檚 buy-side members, despite being the ones CSDR is aimed at protecting, are genuinely concerned about how the rules framework will damage market stability. ICMA owes it to them to do its utmost to protect their interests, he states.
Fanning the flames
Elsewhere in ICMA鈥檚 latest letter, it highlights the recent market troubles sparked by the COVID-19 pandemic as providing a very unwelcome but effective real-life illustration of the 鈥渃atastrophe鈥� a mandatory buy-in provision would bring down on the EU markets during periods of turmoil.
ICMA highlights the period of volatility seen in February and March as new evidence to reinforce its claims that CSDR鈥檚 settlement discipline regime will not only fail to reduce market risk but will, in fact, bring new instability. Hill tells SLT that there are several ways the mandatory buy-in regime would have poured oil on the fire raging in several EU markets, had it been in place in recent months. This includes the fact buy-ins are massively resource-draining, demand the purchase of illiquid assets at any price, and would have pushed players out the market at the exact moment they were needed most.
ICMA notes in the final weeks of Q1, European credit secondary markets came under significant pressure as the market repriced risk and as fund managers responded to sizeable outflows. At the same time, operational infrastructure was stress-tested to its limits, as firms adjusted to working remotely against a backdrop of significantly increased volumes needing to
be processed.
Two main factors allowed the market to continue to function through this disruption, ICMA explains.
鈥淔irstly, the ability and willingness of broker-dealers to continue to make markets for their clients, and secondly a market-wide tolerance of settlement fails (which increased significantly in absolute terms),鈥� it states.
ICMA further argues that, given that a mandatory buy-in regime is designed to make settlement fails economically unviable, and will restrict market-making capacity, it is worth considering how this regime would have impacted the market鈥檚 ability to function during this crisis and the extent to which it would have added to systemic market risks and instability, thereby further amplifying the already extreme dislocations.
In closing, ICMA explains that it and its members 鈥渞emain fully committed to the implementation and objectives of the CSDR settlement discipline measures, and will continue to support initiatives, both regulatory and market-based, to improve settlement efficiency in the EU securities markets鈥�.
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