The CSDR-SD Working Group is focused on the CSDR Settlement Discipline provisions, including the mandatory buy-in regime and cash penalties for settlement fails. The WG aims to identify and resolve practical implementation challenges related to the SD package, as well as directing ICMA’s advocacy work around the regulation. This will result in an updated version of the ICMA Buy-in Rules, which will provide a contractual framework and market best practice to support implementation in the international bond markets.
Members include sell-side and buy-side traders (bonds and repo), as well as operations experts and interested legal, compliance, and regulatory policy representatives.
If you or your firm would like to participate in the CSDR-SD Working Group, or would like to learn more about its focus and operation, please contact the SMPC secretariat. Observers from other associations are also welcome.
CSDR Penalties Workstream
While the implementation of CSDR mandatory buy-ins is expected to be delayed, the regime for cash penalties is set to go live on 1 February 2022. ICMA’s CSDR-SD Working Group has rolled out a Penalties Workstream focused on supporting implementation in the bond and repo markets. The intended outputs of the Workstream can be categorised under:
- Readiness and technical issues / observations
- Article 6 compliance and measurement
- Penalties scope and claims process
- Settlement efficiency and fails prevention
The Workstream is chaired by Nicholas Hamilton of JP Morgan. ICMA is looking for a buy-side co-chair to put themselves forward. The Workstream is working closely with AFME and ECSDA and its outputs are intended to complement the existing initiatives of thee associations.
Any firms interested in participating in the Workstream should contact Mathilde Babel.
Working Group meeting notes
Notes and action points from the CSDR-SD WG and related workstream meetings can be found here:
CSDR-SD WG Meeting notes: 2 June 2020
CSDR-SD WG: Proposed revisions to the ICMA Buy-in Rules for consultation (May 2020)
CSDR-SD WG Updating the ICMA Buy-in Rules: 16 April 2020
CSDR-SD WG Updating the ICMA Buy-in Rules: 7 April 2020
CSDR-SD WG Updating the ICMA Buy-in Rules: 24 March 2020
CSDR-SD Cash Compensation Workstream call: 17 Mar 2020
CSDR-SD Cash Compensation Workstream call: 13 Feb 2020
CSDR-SD WG call: 11 Feb 2020
CSDR-SD WG meeting on SFTs & mandatory buy-ins (with ISLA): 4 February 2020
CSDR-SD Cash Compensation Workstream meeting of 29 January 2020
CSDR-SD WG meeting of 23 January 2020
CSDR-SD WG meeting of 12 December 2019
Going forward, the main CSDR-SD WG will hold meetings/calls every two weeks, as well as regular meetings/calls focused on specific workstreams, including SFTS & buy-ins and best practice for cash compensation.
March 2020: ICMA and AFME submit ESMA Q&As outlining a buy-in pass-on mechanism
On March 5 2020, ICMA and AFME submitted Q&As to ESMA outlining a buy-in pass-on mechanism to enhance the CSDR buy-in process. This is intended to avoid multiple buy-ins resulting from settlement fails in non-centrally-cleared securities, and is considered necessary to maintain market stability. The submission is in the form of two separate Q&As: (i) a pass-on mechanism between failing transactions with the same intended settlement date; and (ii) a pass-on mechanism between failing transactions that may have different intended settlement dates. These proposals were developed as a cross-industry effort, led by ICMA and AFME, and are based on existing mechanisms widely used in the non-cleared markets (such as the ICMA Buy-in Rules).
February 2020: ICMA & ISLA submit ESMA Q&A on treatment of open and open-like SFTs
On 11 February, 2020, ICMA and ISLA, on behalf of the European repo and securities lending community, submitted a Q&A to ESMA requesting Level 3 guidance that open, and open-like, SFTs should be exempted from the CSDR buy-in requirements based on their earliest contractual termination date. This is in line with other regulatory treatments (e.g. for LCR and NSFR purposes) as well as general accounting practice. The results of a survey of ERCC and ISLA members on their treatment of open SFTs was also shared with ESMA.
January 2020: Meeting with ESMA to discuss cross-industry pass-on proposal
On 27 January 2020, ICMA and AFME met with ESMA to discuss the cross-industry proposal for a pass-on mechanism intended to enhance the CSDR mandatory buy-in framework. Following the meeting, the proposal will now be submitted as proposed Level 3 Q&As.
19 November 2019: Outstanding issues
An updated summary of ongoing priorities of the working group and current status.
July 2019: CSDR Industry Working Group: Workshop on designing a buy-in pass-on mechanism
On 1 July 2019, ICMA hosted a cross-industry workshop on designing a buy-in pass-on mechanism that could work under the CSDR buy-in provisions.
The next steps will be to draft a proposal outline, with cross industry input and agreement, that can be presented to ESMA.
Ultimately, ICMA will look to incorporate the pass-on mechanism into its revised Buy-in Rules (post-CSDR).
Note of the workshop
Agenda and supporting materials
April 2019: update on ongoing initiatives and activity
Mandatory buy-ins: General (non-cleared markets)
1) Addressing the asymmetry in the difference payment
In 2018, ICMA discussed with ESMA the importance of a symmetrical difference payment mechanism in the buy-in process and proposed that this could be achieved through contractual arrangements between trading parties, such as the ICMA Secondary Market Rules & Recommendations (which apply automatically to ICMA members transacting in international securities). ESMA was supportive of the idea and is discussing the proposal with the European Commission.
In March 2019, ICMA had a follow-up discussion with ESMA regarding the asymmetry. This time ESMA asked for further clarification on the practicalities of applying a symmetrical approach to the difference payment from the perspective of cash compensation. ICMA has provided ESMA with a detailed explanation and illustration, along with proposed text for Q&As on both buy-in and cash compensation difference payments. We are currently waiting to hear back from ESMA.
2) Facilitating a pass-on mechanism
Following discussions in the CSDR-SD WG, in March ICMA shared and discussed with ESMA a proposal for a potential pass-on mechanism intended to work under the CSDR buy-in framework. The pass-on proposal is based on the current ICMA Buy-in Rules, and, of approved, would allow for pass-ons through transaction chains with multiple intended settlement dates (ISDs).
ESMA indicated that they are keen to allow for a pass-on mechanism, and that this is mandated in the recitals of the regulation. They did not seem averse to a multiple-ISD mechanism, even though this could effectively extend the overall timeline of the buy-in execution beyond the outlined extension periods in the regulation. However, their main concerns with any pass-on proposal are: (i) the ability for (I)CSDs to recognize a pass-on situation and the fact that a buy-in may not be necessary; and (ii) certainty that the buy-in will be executed at some point and cannot be extended ‘out of scope’.
ICMA also recognizes that there is not necessarily a ‘one-size-fits-all’ pass on mechanism for all markets, and that it may be preferable to have more than one mechanism. For example, in the case of more liquid securities, it may be more efficient to execute the buy-in early on, rather than allowing the fail to extend along a chain. This is reflected in the discussions ICMA is having with AFME, and together we are exploring the feasibility of alternative pass-on mechanisms.
3) Other considerations
There are a number of other considerations related to the buy-in process, both from the perspective of regulatory compliance and market best practice, that will need to be addressed by the CSDR-SD WG. These include the possibility that a buy-in agent cannot be found and the buy-in notification framework.
Mandatory buy-ins: SFT specific issues
The CSDR-SD WG is working closely with the ERCC Committee and ERCC Ops WG, as well as with ISLA, on a number of buy-in issues specific to in-scope SFTs.
1) Application of contractual remedies
The ERCC and ISLA believe that under the CSDR buy-in regime it will be more efficient and less disruptive for market participants to exercise the relevant contractual provisions (GMRA/GMSLA) in the case of settlement fail, rather than going to a buy-in. With a view to establishing this as market best practice, ICMA and ISLA have proposed Q&A for ESMA which is intended to provide guidance that in the case of in-scope SFTs, the contractual provisions can be exercised prior to the end of the extension period (even if any subsequent actions or payments are concluded after the extension period).
2) Treatment of open trades
Following discussions between the ERCC and ISLA, there is broad market consensus that open and ‘open-like’ SFT structures should be deemed out of scope of CSDR buy-ins (where the earliest potential contractual termination date is <30 business days).
Following a draft Q&A submission on this point, and a subsequent discussion with ESMA, ESMA has indicated that for such trades to be deemed out-of-scope it will be necessary for (I)CSDs to identify these transactions.
ICMA is in touch with ECSDA with a view to holding a call between ERCC/ISLA members and the (I)CSDs to discuss the necessary requirements and solutions to identify (potentially) out-of-scope SFTs.
3) Buying-in triparty/DBV trades
While applying the relevant contractual remedies before going to a buy-in will be preferable, it will still be important to establish best practice in the event that a buy-in is executed against an SFT. In particular addressing the challenges arising in the case of basket trades, such as triparty and DBV, where there are multiple, substitutable underlying securities. ICMA intends to table this issue for the next call of the CSDR-SD WG on SFTs.
- ICMA will look to organize a new round of meetings/calls of the CSDR-SD WG, and other interested committees and fora, in the near future in order to discuss many of the above issues and to continue to explore potential solutions and action points.
- In the coming months ICMA intends to undertake an extensive consultation of members and the wider industry with respect to updating the ICMA Buy-in Rules to align with and support implementation of the CSDR buy-in provisions, both as a contractual framework and a guide to market best practice.
- ICMA will also refocus its attention on raising broader awareness of the CSDR settlement discipline regime (including cash penalties), particularly among buy-side firms and non-EU members.
- As agreed at the recent meeting of the SMPC, ICMA will also continue to raise awareness of policy makers and regulatory authorities of the potential damage that the CSDR buy-in regime will inflict on European bond market functioning and liquidity, and whilst we prepare for the worst, we will continue to advocate that the CSDR buy-in provisions be reviewed before attempting implementation.
February 2019: ICMA submits proposals for ESMA Q&A on CSDR buy-ins and SFTs
Following discussions with the ICMA ERCC and ISLA, ICMA has submitted two Q&A proposals with respect to the CSDR mandatory buy-in provisions and securities financing transactions (SFTs). These cover:
ICMA will keep members informed of any subsequent feedback or discussions with ESMA.
January 2019: meetings/calls of the CSDR-SD Working Group
- On January 22 the WG discussed the ICMA proposal for a pass-on mechanism intended to work under the CSDR mandatory buy-in framework for non-cleared transactions.
- On January 23 the WG discussed proposals for applying mandatory buy-ins to securities financing transactions, in particular:
- The treatment of open trades
- Calculating the buy-in/cash compensation difference payment
- Best practice for buying-in failing SFT start-legs
Meeting/call of the CSDR-SD Working Group on 20 November 2018
Discussion topics and related follow-up points included updating the ICMA Buy-in Rules to support adoption and as a contractual means to solve for the asymmetry, a proposal for a pass-on mechanism under the CSDR framework, and the various challenges of applying a buy-in regime to SFTs.
Note of call of the CSDR-SD Working Group on 20 November 2018
Draft proposal for a pass-on mechanism under the CSDR framework
ICMA has developed a draft proposal for a pass-on mechanism which could work under the CSDR buy-in framework. Following further input from members and the broader industry, ICMA intends to share the proposal with ESMA.
Draft proposal for a CSDR pass-on mechanism
Adapting the ICMA Buy-in Rules
Following the call of the ICMA Secondary Market Rules & Recommendations (SMR&R) Working Group on 3 July 2018, ICMA met with ESMA to discuss updating the ICMA Buy-in Rules (or a version of the Buy-in Rules) to align with the CSDR mandatory buy-in provisions for in-scope transactions. In particular, ICMA is exploring the possibility of using the adapted ICMA Buy-in Rules to solve for the asymmetry in the regulatory provisions. ICMA will continue to keep members updated as these discussions evolve.
CSDR Mandatory Buy-ins: Adapting the ICMA Buy-in Rules to align with implementation
Call of the CSDR-SD Working Group on 28 June 2018
The first call of the reformed CSDR-SD was held on 28 June 2018. Topics discussed included scope and application of the settlement discipline provisions, raising market awareness, implementation challenges (such as appointing buy-in agents), the potential adaption of the ICMA Buy-in Rules, and future advocacy.
WG members will be kept informed of future calls, meetings, relevant information and proposed output.
Note of call of the CSDR-SD Working Group on 28 June 2018
ESMA Workshop on CSDR-SD
On 5 June 2018, ICMA participated in an ESMA Workshop on CSDR-SD, intended to engage industry associations and representative bodies to highlight and discuss potential challenges of implementing the settlement discipline regime. It is hoped that there will be subsequent industry workshops as the market prepares itself for the 2020 implementation deadline.
More ICMA CSDR-SD resources can be found on the dedicated CSDR-SD webpage.
Senior Director, Market Practice and Regulatory Policy; secretary to the Secondary Market Practices Committee and also responsible for overseeing repo policy.
Direct line: +44 20 7213 0335
Senior Director, Associate Counsel
Direct line: +44 20 7213 0330