Article 7a
Mandatory buy-in process
1.
Without prejudice to the penalty mechanism referred to in Article 7(2) and the right to bilaterally cancel the transaction, after consulting the European Systemic Risk Board and based on the cost-benefit analysis provided by ESMA pursuant to Article 74(4), the Commission may, by means of an implementing act, decide to which of the financial instruments referred to in Article 5(1), or categories of transactions in those financial instruments, the mandatory buy-in process referred to in paragraphs 4 to 10 of this Article is to be applied where the Commission considers that mandatory buy-ins constitute a necessary, appropriate and proportionate means to address the level of settlement fails in the Union.
The Commission may adopt the implementing act referred to in the first subparagraph only if both of the following conditions are met:
(a)
the application of the penalty mechanism referred to in Article 7(2) has not resulted in a long-term sustainable reduction of settlement fails in the Union or in maintaining a reduced level of settlement fails in the Union, even after a review of the level of cash penalties in accordance with Article 7(5), second subparagraph;
(b)
the level of settlement fails in the Union has or is likely to have a negative effect on the financial stability of the Union.
For the purposes of reaching the decision referred to in the first subparagraph, the Commission shall take into account all of the following:
(a)
the potential impact of the mandatory buy-in process on financial markets in the Union;
(b)
the number, volume and duration of settlement fails, including the number and volume of settlement fails outstanding at the end of the extension period referred to in paragraph 4;
(c)
whether a particular financial instrument or category of transactions in that financial instrument is already subject to appropriate contractual provisions that provide a right for receiving participants to trigger a buy-in.
The implementing act shall be adopted in accordance with the examination procedure referred to in Article 68(2). It shall specify a date of application that is not earlier than one year after its entry into force.
2.
ESMA shall publish and keep updated on its website a list of the financial instruments determined by the implementing act referred to in paragraph 1.
3.
Before adopting the implementing act referred to in paragraph 1, the Commission shall:
(a)
assess the effectiveness and proportionality of the penalty mechanism referred to in Article 7(2) and, where appropriate, change the structure or severity of the penalty mechanism in order to increase settlement efficiency in the Union;
(b)
consider whether the conditions referred to in paragraph 1 are met, despite the prior application of the penalty mechanism referred to in Article 7(2) and the rationale for, and potential cost implications of, subjecting specific financial instruments and categories of transactions to mandatory buy-ins.
4.
Without prejudice to the right to bilaterally cancel the transaction, where the Commission has adopted an implementing act pursuant to paragraph 1 and where a failing participant has not delivered the financial instruments covered by that implementing act to the receiving participant within a period after the intended settlement date (‘extension period’) of five business days, a mandatory buy-in process shall be initiated.
By way of derogation from the first subparagraph, based on the asset type and liquidity of the financial instruments concerned, the extension period may be increased to a maximum of seven business days where a shorter extension period would affect the smooth and orderly functioning of the markets concerned.
By way of derogation from the first and second subparagraphs, where the transaction relates to a financial instrument traded on an SME growth market, the extension period shall be 15 business days unless the SME growth market decides to apply a shorter period.
5.
The instruments subject to the mandatory buy-in process shall be available for settlement and delivered to the receiving participant within an appropriate timeframe.
6.
Where there is a settlement fail in a chain of transactions resulting in settlement fails of subsequent transactions in the chain, each participant shall have the right to pass on their obligation to initiate the mandatory buy-in to the next participant in the chain.
The intermediate receiving participant shall be considered as complying with the obligation to execute a mandatory buy-in against the failing participant where it passes on its obligation in accordance with the first subparagraph. The intermediate receiving participant may also pass on to the failing participant its obligations towards the end receiving participant pursuant to paragraphs 8, 9 and 10.
The relevant CSD shall be informed about how the failed transaction was resolved throughout the chain of transactions.
7.
The mandatory buy-in process referred to in paragraph 4 shall not apply to:
(a)
the settlement fails, operations and transactions listed in Article 7(3);
(b)
securities financing transactions;
(c)
other types of transactions that render the buy-in process unnecessary;
(d)
transactions that fall within the scope of Article 15 of Regulation (EU) No 236/2012.
8.
Without prejudice to the penalty mechanism referred to in Article 7(2), where the price of the financial instruments agreed at the time of the trade is different from the price paid for the execution of the buy-in, the difference shall be paid by the participant benefitting from the price difference to the other participant no later than on the second business day after the financial instruments have been delivered following the buy-in.
9.
If the buy-in fails or is not possible, the receiving participant may choose either to be paid cash compensation or to defer the execution of the buy-in to an appropriate later date (‘deferral period’). If the relevant financial instruments are not delivered to the receiving participant by the end of the deferral period, cash compensation shall be paid to the receiving participant.
Cash compensation shall be paid no later than on the second business day after the end of either the mandatory buy-in process referred to in paragraph 4 or, in cases where the receiving participant chooses to defer the execution of the buy-in, the deferral period.
10.
The failing participant shall reimburse the entity that executes the buy-in for all amounts paid in connection with the mandatory buy-in process initiated pursuant to paragraph 4, first subparagraph, including any execution fees resulting from the buy-in. Such fees shall be clearly disclosed to the participants.
11.
Paragraphs 4 to 10 shall apply to all transactions of the financial instruments referred to in Article 5(1) which are admitted to trading or traded on a trading venue or cleared by a CCP as follows:
(a)
(b)
for transactions not cleared by a CCP, but executed on a trading venue, the trading venue shall include in its internal rules an obligation for its members and its participants to apply the measures referred to in paragraphs 4 to 10;
(c)
for all transactions other than those referred to in points (a) and (b) of this subparagraph, CSDs shall include in their internal rules an obligation for their participants to be subject to the measures referred to in paragraphs 4 to 10.
A CSD shall provide the necessary settlement information to CCPs and trading venues to enable them to fulfil their obligations under this paragraph.
Without prejudice to points (a), (b) and (c) of the first subparagraph, CSDs may monitor the execution of buy-ins as referred to in those points with respect to multiple settlement instructions, on the same financial instruments and with the same date of expiry of the execution period, with the aim of minimising the number of buy-ins to be executed and thus the impact on the prices of the relevant financial instruments.
12.
This Article shall not apply where the principal venue for the trading of shares is located in a third country. The location of the principal venue for the trading of shares shall be determined in accordance with Article 16 of Regulation (EU) No 236/2012.
13.
ESMA may recommend that the Commission suspend in a proportionate way the buy-in mechanism referred to in paragraphs 4 to 10 for specific categories of financial instruments where necessary to avoid or address a serious threat to financial stability or to the orderly functioning of financial markets in the Union. Such recommendation shall be accompanied by a fully reasoned assessment of its necessity and shall not be made public.
Before making the recommendation referred to in the first subparagraph, ESMA shall consult the members of the ESCB and the European Systemic Risk Board.
The Commission shall, without undue delay after receipt of the recommendation, on the basis of the reasons and evidence provided by ESMA, either suspend the mandatory buy-in mechanism referred to in paragraphs 4 to 10 for the specific categories of financial instruments by means of an implementing act, or reject the recommended suspension. Where the Commission rejects the recommended suspension, it shall provide the reasons therefor in writing to ESMA. Such information shall not be made public.
The implementing act referred to in the third subparagraph shall be adopted in accordance with the procedure referred to in Article 68(3).
The suspension of the mandatory buy-in mechanism shall be communicated to ESMA and shall be published in the Official Journal of the European Union and on the Commission’s website.
The suspension of the mandatory buy-in mechanism shall be valid for an initial period of no more than six months from the date of application of that suspension.
Where the grounds for the suspension continue to apply, the Commission may, by way of an implementing act, extend the suspension for additional periods of no more than three months each, with the total period of the suspension not exceeding 12 months. Any extensions of the suspension shall be published in accordance with the fifth subparagraph.
The implementing act referred to in the seventh subparagraph shall be adopted in accordance with the procedure referred to in Article 68(3). ESMA shall, in sufficient time before the end of the suspension referred to in the sixth subparagraph or of the extension referred to in the seventh subparagraph, issue an opinion to the Commission on whether the grounds for the suspension continue to apply.
14.
Where the Commission has adopted an implementing act in accordance with paragraph 1, it shall review that decision on a regular basis and at least every four years in order to assess whether the conditions set out in that paragraph remain fulfilled.
Where the Commission considers that mandatory buy-ins are no longer justified or do not address settlement fails in the Union and are no longer necessary, appropriate or proportionate, it shall, without delay, adopt implementing acts amending or repealing the implementing act referred to in paragraph 1.
The implementing act referred to in the second subparagraph shall be adopted in accordance with the examination procedure referred to in Article 68(2).
Where ESMA considers that mandatory buy-ins are no longer justified or do not address settlement fails in the Union and are no longer necessary, appropriate or proportionate, it may recommend that the Commission amend or repeal the implementing act referred to in paragraph 1. Paragraph 13, first to fourth subparagraphs, shall apply mutatis mutandis.
15.
ESMA shall, in close cooperation with the members of the ESCB, develop draft regulatory technical standards to further specify:
(a)
the details of the operation of the appropriate buy-in process referred to in paragraphs 4 to 10, including appropriate timeframes, calibrated taking into account the asset type and liquidity of the financial instruments, for the delivery of the financial instrument following the buy-in process;
(b)
the circumstances under which the extension period could be prolonged according to asset type and liquidity of the financial instruments, in accordance with the conditions referred to in paragraph 4, second subparagraph, taking into account the criteria for assessing liquidity under Article 2(1), point (17), of Regulation (EU) No 600/2014;
(c)
the details of the pass-on mechanism under paragraph 6;
(d)
other types of transactions that render the buy-in process unnecessary as referred to in paragraph 7, point (c), such as financial collateral arrangements or transactions that include close-out netting provisions;
(e)
a methodology for the calculation of the cash compensation referred to in paragraph 9;
(f)
the necessary settlement information referred to in paragraph 11, second subparagraph; and
(g)
the details of how the participants of the CSDs, the CCPs and the trading venue members are to take into account the specificities of retail investors when executing the mandatory buy-in in accordance with paragraph 11.
ESMA shall submit those draft regulatory technical standards to the Commission by 17 January 2025.
Power is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.