The introduction of cash penalties and settlement fails, a major element of the wider Central Securities Depositories Regulation (CSDR), has been implemented today (1 February).
CSDR, which was first proposed by the European Commission in 2010, was initiated to increase market transparency in response to the 2008 Financial Crisis, regulating securities settlement and settlement infrastructures in a harmonised manner across the European Union and the European Economic Area.
However, the European Commission’s mammoth regulation has not been without controversy.
In November, the European Commission announced it had postponed the implementation of CSDR’s mandatory buy-in provisions following months of speculation, as well as industry requests for the execution date — originally scheduled for today — to be pushed back.
Calls for the mandatory buy-in provisions to be delayed increased during the COVID-19 pandemic, due to a wide concern that the introduction of the buy-in element of the settlement discipline regime (SDR) under CSDR would “present a significant risk to Europe’s recovery from the COVID-19 crisis and will likely disproportionately impact on small and medium-sized enterprises and less liquid securities”, an opinion put forward by Association for Financial Markets in Europe back in February 2021.
However, the regulation’s introduction of cash penalties and settlement fails is still to be implemented from today, as intended.
Commenting on today’s CSDR implementation, Daniel Carpenter, head of regulation at Meritsoft, a Cognizant company, says: “With the long-anticipated rules now in place, the industry’s preparations will be put to the test. We know from our engagement with the markets that many firms have updated their systems to manage the penalty processing requirements, but an increasing number share our vision for a more strategic approach to fails management that goes beyond CSDR compliance.”
He adds: “By adopting a more holistic approach that aggregates all the relevant settlement data from across the organisation and makes this accessible through a ‘single pane of glass’, firms can understand which trades are failing to settle and why. Only then can they address operational and counterparty issues to limit the incidence of failures, improve efficiency and, ultimately, reduce their exposure to the CSDR penalties, and to interest claims.”
Jesús Benito, head of BME CSD Iberclear at SIX, says: “We can expect teething problems as from 1 February. This regulation is really complicated and in some instances the regulatory technical details have not been provided with sufficient time or clarity so as to allow the stakeholders to be well prepared in advance. In the medium- to long-term, we believe that the objective of the regulation will be achieved. Participants will give increasing attention to efficiency, in the way they handle settlement instructions.”
