On 1 August the ECB published its Opinion to the Council regarding the Commission's March 2022 Proposal for amendments to the Central Securities Depositories Regulation (CSDR), making a helpful intervention on the topic of mandatory buy-ins.
The mandatory buy-in regime was of course the most controversial aspect of the CSDR's "settlement discipline regime", subjecting counterparties to failing transactions in instruments settled in an EU CSD to prescriptive and complex requirements to implement buy-in procedures (potentially multiple times where one settlement fail lead to a "chain" of subsequent failures). The mandatory buy-in requirement was originally scheduled to go into effect from 1 February 2022, but following significant industry advocacy about the risks the regime posed its application was delayed pending the Commission's review of the CSDR (though other elements of the settlement discipline regime, such as the cash penalties regime, went into effect as scheduled).
Opinion on mandatory buy-ins
The ECB, in its Opinion, now calls for the mandatory buy-in regime to be scrapped entirely, citing its concern for the disruption that the regime might cause to securities markets (e.g. because of the lack of availability of buy-in agents).
Failing that, the ECB welcomes the Commission's proposal to specify through subsequent legislation (an 'implementing act') which financial instruments or categories of transaction should be subject to mandatory buy-ins, but wants any such decision to be further weighed by the Commission - in consultation with the ECB - against the potential effects of such a mechanism on EU financial stability and settlement efficiency. The ECB also urges the EU authorities to consider whether more flexibility could be built in, for example by requiring market participants to contractually agree among themselves how to execute buy-ins rather than being bound to follow prescriptive legislation. Finally, the ECB also calls for securities financing transactions (SFTs) to be excluded entirely.
Given the unpopularity of the mandatory buy-in regime with market participants, this intervention is likely to be welcomed warmly as a source of support for caution in the implementation of the regime and for perhaps encouraging the EU authorities to go further in doing away with mandatory buy-ins entirely.
The ECB also touches on a number of other points raised in the Commission's review:
- Settlement fails not caused by either participant: The ECB is supportive of the Commission's proposal to exclude settlement fails not caused by either participant from both the cash penalties and mandatory buy-in regimes.
- Settlement fails not involving two 'trading parties': Again, the ECB is supportive of excluding these transactions from both cash penalties and mandatory buy-in. However, the ECB wants the scope of this exclusion to be more closely specified in delegated acts to ensure consistent interpretation.
- Timing: To ensure sufficient time for CSDs and others to make system changes, the ECB wants amendments to the scope of the settlement discipline regime only to come into force once the Commission has adopted delegated acts (as opposed to 24 months after amendments to the CSDR are adopted as currently proposed). It is not completely clear whether the ECB is also recommending a 24 month implementation period following the adoption of those delegated acts.
- Banking-type ancillary services: The ECB flags potential risks to financial stability and with respect to conflicts that could result from permitting CSDs to provide banking-type ancillary services to one another, and so recommends the introduction of technical standards to address these concerns.
- Role of CSD NCAs: The EBA is generally supportive of the Commission's proposed changes to increase the role of 'relevant authorities' (i.e. supervisors other than that of the CSD's home Member State) in the authorisation and review of CSDs and the introduction of supervisory "colleges".
Next steps and more information
Our note on the Commission's original reform proposals is available here. With trilogues yet to begin the Commission's proposals of course remain some distance from entering into force, and so it remains to be seen to what extent the ECB's views will prove persuasive on the other EU institutions.
The existence of regulation-driven mandatory buy-ins is a significant interference in the execution of securities transactions and the functioning of securities markets. Because of the implications that the deployment by the European Commission of mandatory buy-ins may have (including with respect to the potential non-availability of a buy-in agent), it would be preferable to discard the possibility of mandatory buy-ins altogether.