The International Securities Market Association (ISMA) has changed its rules and recommendations governing trading in the international securities market by bringing its rulebook more in line with the TBMA/ISMA Global Master Repurchase Agreement (GMRA).
The rule change, shortening the minimum buy-in period between a failure to deliver securities and the execution of a buy-in from the market from 12 to 5 business days, will take effect from 1 January 2004.
“This harmonisation of ISMA’s buy-in rules with the close-out provisions in the GMRA has been achieved simply and quickly by all parties co-operating in the best interests of the market, clearly demonstrating the benefits of a self regulatory regime in ensuring best practice,” says John Langton, ISMA’s Chief Executive and Secretary General.
The majority of cash trading in the international securities market, the largest market for raising international capital, takes place subject to ISMA’s rules and recommendations. These rules permit the buyer of securities to ‘buy-in’ the securities should the seller of the securities fail to deliver them by a specified date, with the difference between the market price and the contract price to be settled between the parties. Similarly the GMRA, the standard agreement for the international repo market, gives the parties certain rights should the seller fail to deliver securities on the purchase date or the buyer fail to deliver equivalent securities on the repurchase date.
Previously a discrepancy in timing between ISMA’s buy-in rules and the GMRA potentially exposed a party who was both a buyer in a cash trade subject to ISMA’s rules, and a seller under a repo transaction governed by the GMRA, to the risk of not being able to recover from the cash seller the full amount required to pay to the repo counterparty. Market participants have been discouraged by this basis risk from borrowing bonds through a repo transaction to cover short positions, leading to increased credit risk.
The harmonisation of the time periods in ISMA’s buy-in and sell-out rules with the GMRA makes borrowing in the repo market more attractive to investment banks and is likely to increase activity in the market.