Bank of England SecLending Committee considers market impact of CSDR

Securities Lending Committee
20 November 2018

The FCA provided some background and update on the current position with regard to the introduction of CSDR. ICMA presented to the Committee on CSDR with a focus on potential issues related to mandatory buy-ins. The buy-in mechanism in the CSDR text could produce potentially asymmetrical outcomes as the economics of an original trade would be impacted by a buy-in depending on whether it takes place at a lower or higher price than agreed in the original trade. In a falling market the buy-in payer is penalised and the receiver benefits, whereas in a rising market the economic impact is neutral. The industry is seeking to establish a potential contractual change which could address this asymmetry. Other issues raised included the implications for existing legal documentation e.g. GMRA and GMSLA, and the possibility of a buy- in agent not being found.

Members discussed cash buy-ins and the risk that funds could essentially become disinvested. This would be expected to be a greater issue in less liquid markets due to lower stock availability. Implications of the implementation of buy-ins on the securities supply side was also discussed as members saw the possibility of perceived higher risks for securities lenders (due to the asymmetry and potential for economic loss in the case of failing a trade) resulting in higher rates demanded or a reduced universe of securities for lending. This would naturally be additionally problematic for securities where the lending market is already relatively illiquid.

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