CSDR

During 2020, market participants will become subject to the settlement discipline regime under the Central Securities Depositories Regulation (CSDR). This includes obligations to prevent settlement fails, as well as measures (such as the imposition of cash penalties) to address settlement fails that have occurred. The regime was due to come into force from 13 September 2020 but is expected to be postponed until at least November.

Most significantly for users of derivatives and structured products, the CSDR imposes a new mandatory buy-in process in respect of transactions involving delivery of transferable securities, money market instruments, units in collective investment undertakings and emission allowances that are to be settled in EU CSDs but which fail to settle. This would include secondary market securities purchases, securities financing transactions with a timeframe of over 30 days for the second leg, and potentially the physical settlement of derivatives transactions.

The buy-in process must be initiated by the relevant receiving (i.e. failed-to) CSD participant (for uncleared OTC trades), the trading venue member (for uncleared on-venue trades), and the CCP (for cleared trades), which must appoint a buy-in agent within a certain extension period depending on the nature of the securities (4 days for liquid securities, 7 days for illiquid securities and 15 days for instruments traded on SME growth markets). The buy-in must be executed within a certain period (the same as the extension period), after which, if it is not successful, the failing CSD participant, trading venue member or clearing member must pay cash compensation to the failed-to party (subject to a deferral period). The failing CSD participant/trading venue member/clearing member must also pay the costs of the buy-in.

The mandatory buy-in regime will require all parties in a settlement chain to reflect the buy-in process in contractual arrangements with counterparties, and parties need to ensure that these arrangements are enforceable in all relevant jurisdictions. Market participants also need to put in place processes to ensure that they execute buy-ins and pay compensation and any price differences within relevant time limits. Because these requirements apply throughout the settlement chain when in-scope products are to be settled on an EU CSD, they potentially impact non-EU trading counterparties or intermediaries, since non- EU counterparties will find their EU counterparties insisting on contractual provisions that facilitate the buy-in process. ICMA announced in November that it will be amending its Buy-in Rules to support the implementation of the CSDR mandatory buy-in provisions.

CSDs and trading venues will include the buy-in requirements in their rulebooks, and as CCPs execute the buy-in for cleared trades, they can also be expected to amend their rulebooks.