NEWS UPDATE
FIXED INCOME
Buy-side agree EU CSDR buy-in
regime will threaten bond liquidity
Asset managers have expressed concerns that the CSDR mandatory buy-in regime will impact
liquidity and increase costs.
A
n impending mandatory buy-in regime under new
EU regulation, which forces market participants to
settle failed trades, will increase costs and threaten bond
market liquidity, the buy-side has largely agreed.
A majority 75% of asset managers and pension funds
expect a negative impact on bond market efficiency and
liquidity when the buy-in regime comes into force in
2020 under the EU Central Securities Depositories Regu-
lation (CSDR), according to a study from the Internation-
al Capital Market Association (ICMA).
Buy-ins, which are presently used at discretion as they
can create unpredictable costs, are used for market par-
ticipants to manage settlement risk in the case of failed
trades, as the buyer goes to market to source the bonds
from another party.
Initiating a buy-in against a failing counterparty will
become a legal obligation under the CSDR regime, with
limited flexibility on timing to complete the process.
The payment of the difference between the buy-in price
14 // TheTrade // Winter 2019
or cash compensation must also be made by the failing
trading entity.
ICMA found that the buy-side is particularly concerned
about bearing the increased costs of widening bid-ask
spreads and decreased liquidity, which may come about
as liquidity providers adapt to the regime. It was high-
lighted that offer-side pricing across fixed income could
be negatively impacted as liquidity providers adapt to
the regime.
Specifically, ICMA said bid-ask spreads of all bond
sub-classes are expected to more than double, with
covered bonds and illiquid investment grade credit
seeing the biggest impact. For absolute price, the impact
is most notable at the lower end of the credit spectrum,
with significant increases for emerging market, high
yield, and illiquid investment grade corporate bonds.
“Corporate bond markets rely heavily on liquidity
providers shorting bonds that they do not own. This has
always been the case. Liquidity is already very challeng-
ing and getting even more so,” ICMA said summarising
buy-side comments on the regime. “This regulation, in
its current form, is likely to mean that banks will not
short bonds. This would have a devastating impact on
market liquidity, function and asset managers ability to
service their clients effectively. It is worrying that many
in a front-office, markets facing position know nothing
or very little about this impending regulation.”
Other comments from buy-side participants included
concerns around solving disputes on the mandatory buy-
in and cash compensation price, the difference in pricing
between quotes depending on where trades are settled,
and the ability for market makers to manage balance
sheets.
The study concluded that the industry has low aware-
ness of the new measure, which will impact bonds set-
tled in Euroclear, Clearstream and other central securities
depositories within the European Union.