When do buy-in and
sell-out rules apply?
The buy-in and sell-out
procedures provide ICMA members with an efficient remedy to deal with
settlement fails in bond markets
What are buy-ins?
A buy-in is a process
whereby a market participant who has purchased securities can enforce delivery
of those securities in the event of the seller failing to make good delivery of
the sale. This is achieved by purchasing the failing securities, for guaranteed
delivery, from another market participant, and cancelling the original purchase
from the failing seller. Any differences between the original purchase price
and the subsequent buy-in price are then settled between the original parties
to ensure that the original purchaser incurs no financial loss (or gain) as
result of the buy-in.
Why are the IMCA
changing the rules?
The changes are the result
of consultation with ICMA’s buy-side and sell-side members, taking into account
the changing market landscape and more challenging liquidity conditions in the
international bond markets; particularly for corporate bonds, high yield, and
The changes aim to provide
a non-defaulting party with increased flexibility to resolve the fail and include: (1) the removal of the requirement to
appoint a buy-in agent to execute the buy-in;
(2) greater discretion as to the timing of the buy-in or sell-out
When do ICMA rules apply?
ICMA’s rules and
recommendations for the secondary market apply to transactions in international
securities. An international security is defined as a security intended to be
traded on an international, cross-border basis (i.e. between parties in
different countries) and capable of settlement through an international central
securities depository or equivalent.
All transactions between
members of the ICMA involving international securities (as defined within the
rules) are subject to the ICMA's rules and recommendations, unless specifically
agreed otherwise by the parties at the time of concluding a transaction. Unless
otherwise stated, the rules and recommendations do not apply to the syndication
and allotment process or to repurchase and to other transactions entered into
under the GMRA or similar master agreements.
How does the ICMA buy-in regime compare
to that of CSDR?
The changes to the ICMA
rules also highlight the potential challenges that European regulators will
face when they try to enforce a mandatory buy-in regime, under CSD-Regulation,
expected sometime in 2019. Many buy-in rules, such as ICMA’s, are exercised at
the discretion of the failed-to party, allowing them flexibility in how they
manage their settlement risk. It is the need for even greater flexibility to do
this effectively that underlies the changes to the ICMA rules. The CSDR Buy-in
regime, however, not only requires the appointment of a buy-in agent and sets
very rigid timelines for executing the buy-in process, controversially it also
mandates that the failed-to party must execute a buy-in after a set deadline
for the fail (4 days in the case of equities, and 7 days in the case of fixed
income). In the event that the buy-in cannot be executed successfully, the
original trade will be replaced with a cash compensation remedy (which creates
a market risk for the failed-to buyer as much as it does for the failing
seller). A further anomaly in the mandatory buy-in regime is an asymmetry in
how the differential between the original trade price and buy-in price is
settled between the original parties to the trade, which effectively creates an
additional layer of risk (and unquantifiable losses) for both sellers and
intermediaries acting as principal.
including ICMA, have expressed concern about the mandatory buy-in regime, which
is not only seen as problematic from an implementation perspective, but is also
expected to have a significant detrimental impact on market liquidity. A 2015
impact study published by ICMA illustrates how market-makers in the European
fixed income markets will either add a significant offer-side premium to their
pricing, or, in the case of less liquid securities, withdraw offer-side
When do the changes
come into effect?
The changes come in to effect on 3 April, 2017,