EU to pare disputed rule for failed stock and bond settlements

By Huw Jones

LONDON, March 16 (Reuters) - The European Union has proposed a pared back version of its disputed rule for failed stock and bond trades after the initial plan was suspended pending a review.

EU rules for settling securities transactions, the final leg of trade where cash is exchanged for legal ownership, includes mandatory buy-ins, meaning the buyer of securities has a right to find a third party, such as a securities depository, to supply them if the original seller fails to deliver.

The side of a transaction responsible for failure to deliver securities would have to pay any difference in price between the original transaction price and prevailing market prices, which could be costly in turbulent markets.

Failed trades are currently sorted out informally between the two counterparties. The new buy-in rule was due to take effect in February but was suspended after regulators warned that market participants were not ready.

The EU's executive European Commission on Wednesday proposed a two-step version of the rule to end a blanket application.

The bloc's European Securities and Markets Authority would report every two years on which types of transactions were prone to settlement failure. The commission would then adopt an act to introduce mandatory buy-ins only for these types of trades, a commission official said.

This two-step process would be repeated every two years to cut down on failed trades and make the capital market more efficient, the official added.

The Association for Financial Markets in Europe, an industry body, said it was still opposed to mandatory buy-ins.

"AFME does not believe mandatory buy-ins are appropriate for any asset class or transaction type and will have disproportionate negative consequences on market liquidity and efficiency that could undermine the attractiveness and competitiveness of EU capital markets," it said.

The reform is part of a wider update to the bloc's rules for the 1,120 trillion euro ($1,230 trillion) central securities depositories (CSDs) sector, which forms the basic plumbing of financial markets.

The update will make it easier for CSDs to conduct cross-border operatiuons in the bloc on a multi-currency basis to increase competition. The current cash penalty on users of a CSD that cause a settlement failure will also be clarified, the official said.

EU states and the European Parliament have the final say on the proposals.

($1 = 0.9103 euros)

(Reporting by Huw Jones Editing by Edmund Blair and David Goodman)

((huw.jones@thomsonreuters.com; +44 207 542 3326; Reuters Messaging: huw.jones.thomsonreuters.com@reuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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