European regulators delay new rules on failed trades
Lobby groups say planned changes will be harmful to stability of bond and exchange traded fund markets
European markets regulators are planning a year’s delay to a new rule imposing penalties on trades that fail to settle on time, after market participants said the coronavirus pandemic had made it impossible to hit next February’s deadline.
Authorities are planning to push back the regime until February 2022, the European Securities and Markets Authority said on Tuesday.
That would mark a second delay for the controversial rules, which lobby groups around Europe have argued will be harmful to the functioning, liquidity and stability of the region’s bond and exchange traded fund markets.
In a letter to Esma, made public on Tuesday, the European Commission noted that “stakeholders” had complained about the tight timeline for implementation, and had argued that the choppy trading of the past few months “would have been significantly worse” if the regime had been in place.
EU watchdogs are taking aim at trades that fail to complete — either because the buyer does not deliver the funds to pay for the deal or because the seller does not supply the securities.
At the moment, failed trades are settled informally between the parties. Under the new rules, trades that fail to settle — usually within a window of two or three days — would face a mandatory “buy-in” to close the deal.
The counterparty, clearing house or central securities depository will be required to buy the asset at the prevailing market price, while the institution responsible for the failure will have to pay an initial penalty, based on the value of the security — as well as any difference between the buy-in price and the original deal.
Investment banks balked at the proposals, saying penalties for failures could push up the cost of trading by billions of euros a year. Big banks each have to deal with about 10,000 failed trades every day in their core European markets, according to Cognizant, a New Jersey-based provider of IT services.
Critics also warned that the new regime would make buying illiquid securities more expensive and more difficult, using the market dislocations of March and April to underline their point.
ICMA, the bond industry trade association, welcomed news of the delay and urged regulators to revise the mandatory buy-in rules as “it is widely recognised that there are a number of design flaws in the . . . framework”.
Regulators had already pushed back an initial launch date of November because users said they needed more time to test new IT systems. The original timeframe also clashed with the implementation of new global standards for software that carries financial messages.
Last month the UK said it would not implement the failed-trade regime once it left the transition period to exit the EU, in one of the first examples of Britain indicating where its financial services laws will diverge from the bloc