The European Commission (EC) has published a proposal for the review of the Central Securities Depositories Regulation (CSDR).
As part of the Capital Markets Union Action Plan — a project launched to establish a true single market for capital across EU member states — the review aims to make securities settlements in the EU safer and more efficient.
Additionally, the proposal aims to facilitate CSDs’ ability to offer cross-border services and improve their cross-border supervision.
In the review, amendments are required under the settlement discipline regime of CSDR, which states that settlement fails are not subject to the penalty mechanism in situations where “a settlement fail is caused by factors not attributable to the participants to the transaction or where a transaction does not involve two trading parties”.
Furthermore, it specifies that cash penalties should be calculated either until the end of the buy-in process, if the Commission has adopted the relevant implementing act, or until the actual settlement date, whichever is earlier.
The proposal continues to amend matters relating to third-party CSDs, the passporting regime and banking-type ancillary services.
The International Securities Lending Association (ISLA) has announced that it will be reviewing the proposal within the Market Practice Steering Group and Regulatory Steering Group.
The EC changes were welcomed by the Association for Financial Markets in Europe (AFME), after the organisation's previous hesitancy toward prior mandatory buy-ins rulings.
However, the organisation remains cautious around mandatory buy-ins, which it says could undermine the European capital markets’ competitiveness.
Pete Tomlinson, director of post-trade at the AFME, says: “AFME members continue to support the objective of improving settlement efficiency in European capital markets in a proportionate and effective manner. AFME, therefore, welcomes today’s decision from the Commission to avoid immediately introducing mandatory buy-ins.
“In particular, the proposed two-step approach is practical as it will provide the opportunity to assess the impact of the penalties regime and other measures. AFME remains confident this will result in a reduction in settlement fails. The proposal to clarify and simplify passporting rules is also helpful and we hope this will support increased cross-border issuance and promote further competition amongst CSDs.”
The AFME highlights the lack of clarity surrounding how the EC intends to assess whether or not settlement efficiency has reached ‘appropriate levels’. It recommends that a clear framework is established to measure this to provide greater certainty to market participants.
Tomlinson adds: “AFME does not believe mandatory buy-ins are appropriate for any asset class or transaction type and will have a disproportionate and negative consequence on market liquidity and efficiency that could undermine the attractiveness and competitiveness of EU capital markets.
“Other tools may be more effective at achieving the settlement efficiency objective and should be considered as a second step, should this be necessary, instead of mandatory buy-in provisions. These could include increasing penalty rates or measures to increase the use of partial settlement.”
To accompany the package, the EC has also issued a chapeau communication and Q&As, as well as an impact assessment and a summary of the impact assessment.
