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SECONDARY MARKETS
Issue 34 | Third Quarter 2014 www.icmagroup.org
traded under ICMA rules, ICMA will also change the standard settlement cycle set out in the ICMA Rules and Recommendations from T+3 to T+2 unless otherwise agreed; it is expected that agreement to a different settlement cycle will be recorded in writing at the time of trade.
Security financing transactions Security financing transactions such as repurchase agreements will also migrate from the standard trade date of two business days (T+2) to standard trade day plus one day (T+1), unless specified otherwise. The practical effect of the migration to T+2 for cash transactions for international securities and to T+1 for repo transactions is illustrated. Contact: John Serocold john.serocold@icmagroup.org
is still failing, the disappointed counterparty can instruct a third-party buy-in agent to buy the securities on their behalf. These securities are then delivered to the disappointed counterparty, while any difference between the buy-in price and the original trade price is settled directly between the failing seller (who is said to be “bought in”) and the disappointed buyer. In this way, both parties are returned to the position they would have been in had the transaction settled on the original settlement date. ICMA has buy-in rules to govern certain trades in international securities between ICMA members, while various central securities depositories (CSDs) and central counterparties (CCPs) may have their own rules and procedures. The Global Master Repurchase Agreement (GMRA) provides for remedies in the event of a failing repo. In most cases, buy-ins are exercised on a discretionary basis, and are relatively infrequent in the European fixed income markets.
CSD Regulation: mandatory buy-ins
CSD Regulation framework for mandatory buy-ins
ESMA Discussion Paper on CSD Regulation
Article 7 of CSD Regulation states that any participant in a securities settlement system that does not deliver the financial instruments to the receiving participant “shall be subject to a mandatory buy-in procedure that will apply to all transactions in such instruments which are admitted to trading on regulated markets or MTFs, traded on a trading venue or cleared by a CCP”. The Regulation specifies a time period between failing on due settlement date and initiating a buy-in (the “extension period”) of four days, with the possibility of extending up to seven days, depending on the liquidity of the underlying security. Furthermore, the Regulation suggests that buy-in procedures can be managed by a CSD, a trading venue, or a CCP.
In March 2014, ESMA published a Discussion Paper on the Draft Technical Standards for the Regulation on Improving Securities Settlement in the European Union and on Central Securities Depositories, inviting comments on matters relating to the technical standards of the regulation. A number of questions related to the framework for settlement discipline. Of particular interest from a fixed income market perspective were questions related to the provisions for introducing mandatory buy-ins to the European bond and repo markets, and the practicalities related to appropriate buy-in timelines, the circumstances under which a buy-in may not be possible, and the circumstances in which a buy-in could be deemed ineffective. Given the complexity of these issues, ESMA agreed that responses could be submitted after the original response deadline of 22 May 2014. This has resulted in industry-wide discussions around these issues, including amongst ICMA SMPC and ERC members and other industry representative bodies.
What is a buy-in? A “buy-in” is a contractual remedy that can be exercised in the event that a counterparty selling a security fails to deliver that security to the purchasing counterparty on due settlement date. After giving the seller due notice of their intention, and if the purchase
Treatment of SFTs Article 7(14)(e) outlines the treatment of securities financing transactions (SFTs) under a mandatory buy-in regime, from the perspective that “operations composed of several transactions including securities repurchase and lending agreements, the buy-in … shall not apply where the timeframe of these operations is sufficiently short and renders the buy-in ineffective”. This would suggest that the start-leg of short-dated SFTs would be exempt, but not the start-leg of term SFTs. It is unclear as to how the end-legs of all SFTs would be treated, but it is widely assumed that these would also be subject to mandatory buy-ins.