Delayed: CSDR settlement discipline regime
05 February 2020 Paris
Image: Shutterstock
ESMA has recommended a delay to the Central Securities Depositories Regulation (CSDR) settlement discipline regime until 1 February 2021, following a deluge of warnings from those in-scope that the rules would damage market stability.
The settlement discipline regime was originally due to come into force on 13 Septemeber and includes mandatory buy-ins and cash penalties of failed trades.
Industry bodies representing a huge swathe of European financial markets have consistently been sounding alarm bells that both these features – especially the buy-in rules – will in fact do the opposite of their intended aim of protecting buy-side participants from losses by improving settlement rates.
Most notably, 14 trade associations recently sent a joint letter to ESMA and the EC requesting a delay to the settlement regime due to a range of concerns highlighted in research by the International Capital Market Association and elsewhere.
Today, following weeks of market speculation, the European Securities and Markets Authority (ESMA) has acknowledged the industry’s concerns. It has submitted a report to the European Commission (EC) requesting a postponement until next year in order to efficiently manage amendments to CSDR’s regulatory technical standards (RTS).
Following the endorsement of the EC, the related Commission Delegated Act will be sent to the European Parliament and Council for final scrutiny.
No estimated timeline for this process was given by ESMA.
Why was the delay granted?
ESMA’s rationale for the delay acknowledges concerns raised by stakeholders but focuses mainly on the ISO-related technical issues first reported in November 2019.
The EU watchdog explains that due to the far-reaching impact of the regime, a pushback would be needed to accommodate the estimated time needed for vital IT system changes and the development and the updating of ISO messages as well as market testing and adjustments to legal arrangements between the parties concerned.
These issues must take into account the 22 November 2020 go-live date for the ISO messages annual release, as well as the need to have a “reasonable buffer to cover for operational complexities after the go-live, and in order to avoid an overlap with the end of the year/ beginning of the year system freeze,” ESMA adds.
The authority also cites “new developments, such as the envisaged go-live date of the Target2-Securities penalty mechanism,” as a driver behind the decision.
“Given the extensive IT developments which are needed for the implementation of the new settlement discipline requirements, stakeholders have highlighted the need for more time before the entry into force of the already published RTS on settlement discipline,” ESMA states.
The International Securities Lending Association, which was one of the 14 trade bodies to write to European regulators last month, says it welcomes the decision and that it will continue to work with fellow associations to gain further clarity on how CSDR will impact the securities lending industry.
The settlement discipline regime was originally due to come into force on 13 Septemeber and includes mandatory buy-ins and cash penalties of failed trades.
Industry bodies representing a huge swathe of European financial markets have consistently been sounding alarm bells that both these features – especially the buy-in rules – will in fact do the opposite of their intended aim of protecting buy-side participants from losses by improving settlement rates.
Most notably, 14 trade associations recently sent a joint letter to ESMA and the EC requesting a delay to the settlement regime due to a range of concerns highlighted in research by the International Capital Market Association and elsewhere.
Today, following weeks of market speculation, the European Securities and Markets Authority (ESMA) has acknowledged the industry’s concerns. It has submitted a report to the European Commission (EC) requesting a postponement until next year in order to efficiently manage amendments to CSDR’s regulatory technical standards (RTS).
Following the endorsement of the EC, the related Commission Delegated Act will be sent to the European Parliament and Council for final scrutiny.
No estimated timeline for this process was given by ESMA.
Why was the delay granted?
ESMA’s rationale for the delay acknowledges concerns raised by stakeholders but focuses mainly on the ISO-related technical issues first reported in November 2019.
The EU watchdog explains that due to the far-reaching impact of the regime, a pushback would be needed to accommodate the estimated time needed for vital IT system changes and the development and the updating of ISO messages as well as market testing and adjustments to legal arrangements between the parties concerned.
These issues must take into account the 22 November 2020 go-live date for the ISO messages annual release, as well as the need to have a “reasonable buffer to cover for operational complexities after the go-live, and in order to avoid an overlap with the end of the year/ beginning of the year system freeze,” ESMA adds.
The authority also cites “new developments, such as the envisaged go-live date of the Target2-Securities penalty mechanism,” as a driver behind the decision.
“Given the extensive IT developments which are needed for the implementation of the new settlement discipline requirements, stakeholders have highlighted the need for more time before the entry into force of the already published RTS on settlement discipline,” ESMA states.
The International Securities Lending Association, which was one of the 14 trade bodies to write to European regulators last month, says it welcomes the decision and that it will continue to work with fellow associations to gain further clarity on how CSDR will impact the securities lending industry.
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