(Bloomberg) --

Big banks and money managers are ramping up a lobbying campaign against looming European trading regulations, arguing that they would have exacerbated market stress during the peak of the coronavirus outbreak.

The rules for handling failed stock and bond trades “would have turned a crisis into a catastrophe” by adding even more volatility and expense to transactions, according to a report published Thursday by the International Capital Market Association, a longstanding critic of the change. Failed trades spiked in late March as firms working remotely struggled to move a surging volume of securities through settlement systems.

The association, which has said the rules could add 35 billion euros ($38.6 billion) a year to the cost of dealing, wrote to authorities last week asking them to reconsider the policies before they start next February. The European Commission, the European Union’s executive arm, is reviewing the industry’s request and considering the issue, a commission official said on Wednesday.

The coronavirus crisis, which has already prompted emergency relief for the financial industry, is now spurring companies and regulators to consider more permanent changes to the rule book. European authorities are also considering changes to the revised Markets in Financial Instruments Directive, or MiFID II, to ease burdens on traders.

‘Compounding Chaos’

The EU rules will force investors to rescue a failed trade by asking a third party to acquire the security instead, in a currently optional deal known as a buy-in. The seller that failed to transfer the security at the agreed time and price could be forced to shoulder any cost difference. They could also be obliged to pay cash compensation if the trade can’t be completed.

The spike in volatility in March triggered a surge in such cases, with more bond transactions falling through and the sellers in about 12% of equity transactions by value failing to transfer the security, according to the European Securities and Markets Authority.

While firms worked over a weekend to fix the settlement problems this time, ICMA said the forthcoming rules will upend many of the industry’s practices and frustrate a voluntary process of reconciling trades.

“Trying to execute buy-ins in highly illiquid securities, chasing a market to buy at any price you can, to be a distressed buyer in illiquid assets would be completely destabilizing,” Andy Hill, ICMA’s senior director of market practice and regulatory policy, said in an interview. “It compounds the whole chaos of the scenario.”

Hill said European authorities should reconsider the regulation and conduct a thorough analysis of the costs before it begins.

©2020 Bloomberg L.P.