Brussels is racing to delay the introduction of new rules on trades that fail to settle, with banks and asset managers uncertain if they need to spend hundreds of millions of dollars on compliance with standards likely to be rewritten.
EU country representatives will meet this week to discuss a route through the Brussels legislative process to halt the arrival of the contentious rules, which market participants have warned would harm the region’s capital markets, and hit investors around the world.
The rules, which are due to come in to effect in February 2022, would force the banks and asset managers using EU securities depositories into a mandatory “buy-in” process if a trade fails, potentially squeezing market liquidity, raising costs and leaving them less able to hedge their risks. The rules cover all securities, including stocks and bonds.
At the moment, failed trades are usually resolved informally between buyer and seller. Under the new rules, to close a failed trade, a counterparty such as a securities depository will be required to buy the asset at the prevailing market price. The institution responsible for the failure will have to pay any difference between the buy-in price and the original deal.
The rules are designed to ensure investors receive the goods they paid for, particularly in a volatile market. But regulators have accepted warnings from banks and asset managers that the rules are likely to hit the EU’s bond and exchange traded funds markets and make them less attractive to international investors. Market volatility, such as the pandemic-related episode of March 2020, could further exacerbate problems with the standards, according to a paper circulated by Italian diplomats and seen by the Financial Times.
Blocking the introduction of the new rules is tricky, however. One plan is to add a clause postponing the introduction into unrelated upcoming legislation on digital ledger technology, the paper said. The matter will be discussed at a meeting on Wednesday as the clock ticks down on the new rules coming in to force.
Market participants have also been concerned at the wide-ranging scope of the rules, as they cover any trading party around the world that uses an EU central securities depository. That includes Belgium’s Euroclear and Clearstream of Luxembourg, which collectively hold around €50tn of assets in custody for global investors.
In June, the European Commission said it would revisit the rules to “avoid potential undesired consequences” but did not give a timeframe for action, setting up a potential collision with their formal introduction on February 1.
The Italian paper proposed to delay the deadline for mandatory buy-ins but allow other parts of the legislation, such as penalties for trade failures, to come into effect. The buy-in clause could then be addressed in a separate review, it suggested.
Pete Tomlinson, director of post trade at Afme, a lobby group, said it was encouraging that authorities recognised the problems with the buy-in regime and hoped it would be postponed.
“We are already past the point at which the industry would ideally have liked this to be clarified. We are at the stage now where every day counts,” he said.
“Putting aside the question of whether the current rules should be implemented, it’s not clear that the current rules can be implemented. There are a number of questions where the industry is waiting for the authorities to provide interpretative guidance,” he added.
Esma, the EU’s market regulator, last month urged the European Commission to delay the February introduction and provide more clarification on its plans by the end of October at the latest. The EU has already delayed the introduction of the rules because of the coronavirus pandemic. The UK has said it will not implement the buy-in clause.