CSDR Buy-In Rules a ‘Conundrum’ for ESMA, says Maijoor

Finalizing details over new rules that set out to guarantee failed trades is a “conundrum”, according to the chief of Europe’s regulatory authority.

Under the incoming Central Securities Depositary Regulation (CSDR), a new settlement discipline regime will come into force whereby failed trades will face a mandatory buy-in, in which the CSD would have to buy back the asset at the prevailing market price and deliver it to the non-defaulting counterparty.

Following consultations with market participants, there has been heavy criticism with this rule, in which major CSDs and banks argue the buy-in process should take place at the trading level, not the settlement level.

It is now up to the European Securities and Markets Authority (ESMA) to finalize these details, which could have significant effects on the industry.

“They (banks and CSDs) claim… that they face the risk of the cost of the buy-in, they will demand guarantees and collateral to their clients to cover that risk, rendering the system more expensive,” says Steven Maijoor, chair, ESMA, in a speech to the Economics and Monetary Affairs Committee.

“However, if the launch of the buy-in is left to the discretion of the ultimate clients, who will be in many cases outside the Union….this, will cause obvious enforceability problems.

“ESMA is therefore, facing here an interesting conundrum, which is our current priority.”

ESMA is expected to provide technical advice and draft standards on the regulation in the second quarter of this year.