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New Year’s resolution: fix my trade exceptions

The year 2020 is going to be a big one in the world of failed trades.


What price is worth paying to reduce failed trades? According to the European Union’s central securities depositories regulation (CSDR), quite a big one.

The regulation is scheduled to implement a new mandatory buy-in regime in September 2020, and although market participants expect this to be delayed, it is unlikely to be by more than a few months.

It matters because the proposed framework is set to hurt market-making willingness and therefore liquidity, particularly in sectors that are already less liquid.

Cleared markets tend to have their own rules around buy-ins, but for non-cleared markets, instead of the current regime of voluntary, contractual buy-ins, the regulation will impose a legal duty to issue a buy-in against the failing counterparty where a trade has failed to settle within seven days.

Market participants who have not yet taken steps to address this had better get a move on

Crucially, the new rules will create asymmetric treatment of parties. Rather than a buy-in resulting in the original counterparties being restored to the economic position they would have been in had the trade succeeded, buy-ins under CSDR only allow payments to be made from a seller to a buyer, meaning that a seller is penalized when a buyer is able to source a security cheaper through a buy-in.

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