It is written in the polite manner of Brussels’ salons – but the message in a letter from 14 European finance-industry associations to the EU commission is clear: The planned mandatory buy ins – under the incoming Settlement Discipline Regime (SDR) – will cause really bad damage.
[For a quick backgrounder on the CSDR Settlement Discipline, AFME has published this four-page folder.]
“We respectfully request the authorities to consider a cautious, phased-in approach to ensure the successful implementation of the cash penalty regime and reconsider the mandatory nature of the buy in,” the group of 14 associations write in their letter.
In other words: Postpone the cash penalties, and consider scrapping the mandatory buy ins.
Both investors and banks
It is a broad group that has joined forces to put their request forward, representing both buy- and sell-sides in the securities markets, and various links in the chain of the trade lifecycle:
· The Association for Financial Markets in Europe (AFME)
· Association Française des Professionnels des Titres (AFTI, France’s post-trade organization)
· The Association of Global Custodians (AGC)
· The Alternative Investment Management Association (AIMA)
· Association française des marchés financiers (AMAFI)
· Assogestioni (Italy’s investment management association)
· Assosim (Italy’s investment intermediaries)
· German Investment Funds Association (BVI)
· DACSI (the Netherlands’ securities industry)
· The European Banking Federation (EBF)
· The Electronic Debt Markets Association (EDMA)
· The International Capital Market Association (ICMA)
· The International Securities Lending Association (ISLA)
· The Investment Association (UK investment managers)
Bid-ask spreads could double
They paint a dark picture of the landscape on the other side of September, when the cash penalties and mandatory buy-in rules are scheduled to come into force:
“With respect to bond markets, the 2019 ICMA Impact Study indicates that 100% of sell-side responders and 80% of buy-side responders expect that mandatory buy-ins will negatively impact overall efficiency and liquidity. Market makers expect to widen bid-ask spreads by at least 100%, with a greater impact expected on illiquid asset classes, and full withdrawal from market making in some instances.”
The Settlement Discipline Regime (SDR) is an effect of the EU’s Central Securities Depository Regulation (CSDR). As it is summed up in the letter, the SDR is made up of three main features:
1. rules for the trade allocation and confirmation process,
2. cash penalties on failed transactions, and
3. the mandatory buy-ins.
Notably, the signatories are positive to the first, and speak generally positively about the idea of the second of the cash penalties, although they propose a delay of these.
”Improved allocation and confirmation processes, and the introduction of cash penalties to incentivise timely settlement, are important and necessary measures that should lead to a significant improvement in settlement rates. That CSDs will be required to facilitate hold and release and partial settlement functionality is also expected to contribute to improved settlement efficiency,” they write.