Our experts explore what is next for CSDR post-implementation, the settlement discipline regime and the future of mandatory buy-ins.
The European Commission has proposed a refit of CSDR in order to simplify the application of the regulation and introduce changes to facilitate cross border services.
CSDR has many implications for our clients. These can be broadly categorised as resulting from extended CSD requirements, internalised settlement reporting and the settlement discipline regime.
Settlement Discipline Regime (SDR)
The implementation of SDR has not followed an easy path:
- It was delayed until 1 February 2022 due to the Covid-19 pandemic,
- The mandatory buy-in regime was decoupled from the penalties regime in December 2021 in order to be postponed in its application (timeframe yet to be published),
- A CSDR Refit initiative by the European Commission was proposed on 16 March 2022, providing a new framework for settlement discipline.
SDR affects all market participants and settlement efficiency is key to meet the requirements of SDR in its current or in its yet to be discussed Refit version.
The Settlement Discipline Regime was designed to harmonise some aspects of the settlement cycle and introduced new rules for cash penalties and buy-ins. Trading parties, central counterparties (CCPs) and trading venues are impacted by SDR and, even though the buy-in regime was not enacted in February 2022, they have to comply with the measures relating to cash penalties for settlement failures. Those measures have proven intricate to implement since they came into force on 1 February 2022.
The CSDR Refit initiative
CSDR Refit would introduce the following changes:
- A passporting mechanism with simplified requirements for CSDs and Authorities,
- Colleges of Supervisory Authorities in order to improve supervisory convergence,
- A review of the thresholds under which CSDs can provide banking-type ancillary services,
- A review of the scope and the mechanisms of the settlement discipline introduced by article 7 in order to address settlement fails more appropriately and proportionately.
Suspension of the mandatory buy-in regime
The suspension of the current mandatory buy-in regime should be looked at together with its refit regime proposing:
- A revised scope excluding settlement discipline measures to transactions that do not involve two trading parties,
- A two-step approach, giving time to penalties to produce effects on settlement efficiency before considering the introduction of mandatory buy-ins,
- A possible application limited to a set of “financial instruments” or “categories of transactions” and conditioned on benchmark reviews with third-country markets and financial stability impacts,
- The introduction of a pass-on mechanism.
Securities Services’ view
The European financial industry has been long advocating for the mandatory buy-in regime to be removed or substantially modified, highlighting the potential operational complexities, inefficacy and administrative burdens of such a measure.
The proposal made by the Commission through this CSDR Refit initiative is a step in the right direction even though it will still require discussions with the Member States and the European Parliament before it can take a final form.
The difficulties seen with the implementation of the penalties in February 2022 and their effects over time will surely provide significant feedback to policy makers in evaluating the costs and benefits of any additional settlement discipline measures, if any.