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The following options are analysed in this consultation paper. For each option the strengths and weaknesses of it are described. Stakeholders are invited to provide feedback and quantitative elements to sustain those on the relevant options and arguments associated to each option:
Option 1 – Trading level execution
Option 2 – Trading level with fall-back option execution
Option 3 – CSD participant level execution
In option 1, the trading party, i.e. the party at the origin of the transaction, is responsible for the buy-in. Some stakeholders called for this approach in their answers to the previous consultation paper that dated 18 December 2014. With this approach, the buy-in rules would have to apply throughout the settlement chain up to the trading parties. As the trading party could be the participant itself, the direct client of the participant or could involve several intermediaries, the rules of the CSDs and the contracts between the different intermediaries would have to ensure the application of the buy-in framework.
In option 2 the trading party, i.e. the party at the origin of the transaction, is responsible for the buy-in. However, in case the trading party does not perform the buy-in, the participant would be responsible for paying the cash compensation. Nevertheless the participant has the right to request to be further reimbursed by its clients, up to the trading party, according to the contractual arrangements in place. It is important to keep in mind that the cash compensation is not equal to the principal amount of the transaction but to the difference between the price of the transaction and the current price of the securities i.e. the variation. It could be envisaged that should the failure to execute the buy-in be due to the insolvency of the trading party, the participant would not be liable for the payment of the cash compensation. As a result, the participant would not need to cover for the risk of default of the trading party and therefore would not need to request collateral.
Under the third option, the participant is responsible for the buy-in process. When the buy-in is not possible the participant would be responsible for the payment of the cash compensation. The buy-in obligation results from the transposition of the requirement in the rules of the CSD that are binding upon the participant. As the CSD is under the direct supervision of the NCA, the NCA will have the ability to ensure the buy-in rules are appropriately applied. So the binding effect of clear rules is reinforced compared to a situation where it depends on a chain of contracts between intermediaries.
The Consultation is open until 6 August 2015.