Settlement discipline measures are needed – but ease the time plan and scrap the idea of mandatory buy-ins. This is part of the message as European finance industry association AFME sums up its view on CSDR in a position paper. 

“The introduction of mandatory buy-ins presents a significant risk to Europe’s recovery from the Covid-19 crisis and will likely disproportionately impact on SMEs and less liquid securities.” This is stated by the Association for Financial Markets in Europe (AFME), as it chips in its views in a position paper for the EU’s review of the Central Securities Depositories Regulation (CSDR). 

While acknowledging other measures such as partial settlement facilitation, new trade allocation requirements and panalties on failed trades, the association stresses that the upcoming regime of mandatory buy-ins in certain cases of settlement failure is disproportionate in relation to the problem it targets. 

PostTrade 360 Nordic 2024

“Wider spreads and less liquidity”

“The purpose of the mandatory buy-in is to ensure remediation of the small percentage of trades that continue to fail for multiple business days. The impact of the mandatory buy-in regime will be wider spreads and less liquidity, meaning more expensive and less efficient capital markets for Europe’s issuers and investors. The negative effect is clearly disproportionate to the problem the mandatory buy-in is trying to fix – especially at a crucial period in Europe’s economic recovery from Covid-19.”

An improvement over the mandatory buy-ins would be to make them, instead, a discretionary right for the receiving party. “A discretionary buy-in regime will mean the buy-in is only used in cases where it is necessary and effective and will avoid significantly damaging market liquidity,” writes AFME.

Settlement failure penalties and mandatory buy-ins are both currently scheduled to apply from February 2022. Yet AFME argues that the buy-in obligation should at least be postponed to a point after the introduction of the fines. Thus the impact of the fines could first be monitored, and industry participants would have time to adjust in case the current buy-in rules are amended.