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ICMA introduces flexibility to secondary bond market buy-ins and sell-outs

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 emerging markets.


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 execution


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.


Market participants, 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 liquidity altogether.


When do the changes come into effect? 

The changes come in to effect on 3 April, 2017,


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