ICMA Pulishes Guidance to Promote Settlement Efficiency in Secondary Bond Markets

ICMA (International Capital Market Association) has published a set of best practices recommendations to promote settlement efficiency in international secondary bond markets. 

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The recommendations are intended to be viewed in the context of the EU's CSDR Settlement Discipline regime. which has introduced a penalty mechanism for settlement fails and may in future also introduce a mandatory buy-in regime that could be applied to certain markets if settlement efficiency does not improve.

The best practice recommendations cover four topics:

Shaping: It is best practice to divide or "shape" instructions for the delivery of a large trade size into smaller deliveries or "shapes" to limit settlement failures' economic impact and help reduce intraday liquidity consumption. Shaping does not break up a transaction into smaller contracts; it is a purely operational process.

Partial settlement: It is best practice for partial deliveries to be accepted whenever there has been a delivery failure, to reduce the economic impact of fails on the counterparty as well as on the liquidity of cash and repo markets. Partial settlement should be completed as swiftly as possible, and parties should opt into the use of auto-partial facilities at CSDs.

Auto-borrowing: It is best practice for participants to sign up and auto-borrowing or automatic pool lending facilities made available by ICSDs and CSDs fill shortfalls where sellers have insufficient securities to meet their delivery obligations.

Technical netting: It is best practice for parties to cooperate on technical netting to maximise both bilateral and multilateral opportunities. This includes the use of pair-offs between related bonds and repo transactions to reduce settlement cost and risk.