JUNE 03, 2024
The Settlement Discipline Regime (SDR) phase of CSDR successfully went live on 1 February 2022, without the mandatory buy-in requirement. Two years on, the amended version of CSDR, known as CSDR Refit, aims to make securities settlement in the EU more efficient and is currently in consultation stage. An overhaul of the penalty system is a key proposal.
Explore our insights and what this might mean for your firm.
Overview
The Central Securities Depositories Regulation (CSDR) introduced new measures for the authorisation and supervision of EU Central Security Depositories (CSDs) and sets out to create a common set of prudential, organisational, and conduct of business standards at a European level. A large part of CSDR is designed to support the achievement of the objectives of Target2Securities (T2S) system by the introduction of a securities settlement discipline regime. This harmonises operational aspects of securities settlement, including the provision of shorter settlement periods; and cash penalties, to prevent and address settlement fails.
Scope
The CSDR applies to all European CSDs and to all market operators in the context of securities settlement. Trading parties, central counterparties (CCPs), clearing and settlement agents (which are members of the CCPs and CSDs) and trading venues will also be impacted and will have to directly comply with some of the measures, in particular the introduction of mandatory buy-in regime and cash penalties for settlement failures.
Key Objectives
- To harmonise the different rules applicable to the CSDs in Europe
- To establish a level playing field among these CSDs
- To increase the safety of securities settlement and the settlement infrastructures in the EU
- To increase the efficiency of security settlement through introducing a true market for the operations of national CSDs
- To increase safety of CSDs through applying high prudential requirements in line with international standards
- To create an integrated market for securities settlement with no distinction between national and cross-border securities transactions
Key Impacts
Phase 1 and 2 – Omnibus/Segregated Accounts and Internalised Settlement Reporting
Phase 1, where providers are required to offer the option of individual segregated accounts, and Phase 2, the requirement to report internally settled trades have both been implemented. The list of authorised CSDs for CSDR can be found here.
Phase 3 – Settlement Discipline Regime (SDR)
Phase 3 went live on 1 February 2022 and introduced a number of measures to prevent settlement fails by ensuring that all transaction details are provided to facilitate settlement, as well as further incentivising timely settlement by cash penalty fines and buy-ins.
EU CSDR Refit
The amended version of CSDR, known as CSDR Refit aims to make securities settlement in the EU more efficient. It came into force on 16 January 2024, although some of its provisions will need to be supplemented and ESMA has been asked to provide technical advice and draft proposals which will be covered under three consultations during 2024-2025.
Whilst various areas have been reformed, the topic that has attracted the most attention is the settlement discipline and the two key measures:
- Mandatory Buy-Ins (MBIs) – Will only be implemented in a limited number of circumstances. MBIs shall not apply to securities financing transactions or other types of transactions that render the buy-in process unnecessary (to be further specified by a delegated act). ESMA confirmed in July 2024 that mandatory buy-ins will not come into force until at least late 2026.
- Cash Penalties – The consultations issued so far have focussed on the penalty system itself with an overhaul of the current mechanism proposals which has raised several concerns across the industry.
Linda Gibson, Head of Regulatory Change (July 2024)
We have seen that settlement efficiency has shown steady and consistent improvements since CSDR going live. We have also seen that partial settlement is now more common in the marketplace which whilst not greatly impacting the settlement efficiency rate, it has reduced the value of the fails which is evidenced through the reduced value of the penalties.
Overall, the penalty mechanism acts as a deterrent in that it discourages settlement fails and incentivises timely settlement.
The current thinking from the EU regulators is to only introduce buy-ins if the penalties regime doesn’t work and that will not come into force until late 2026 or potentially, drop mandatory buy-ins completely. This is a good result for the industry.
Meanwhile, the EU CSDR Refit initiative focussed on amending the CSDR, is in consultation stage with ESMA expected to publish its final report along with draft technical standards for endorsement by the European Commission by 17 January 2025.
Elsewhere, at the end of May 2024, the North American markets and Mexico moved to T+1 settlement and the UK, EU and Switzerland are currently reviewing how and when to follow and move to T+1 settlement. Any move to T+1 settlement will require a change to the CSDR legislation.
UK CSDR - It is also worth noting that CSDR was onshored into legislation however, the CSDR settlement discipline regime had not begun to apply before the end of the transition period and could not be included in the UK CSDR as part of the onshoring process. Consequently, HM Treasury decided not to implement the EU CSDR settlement discipline regime in the UK. The UK CSDR will be revoked under the FSMA 2023 as part of the UK government’s wider work programme relating to retained EU law.
Settlement efficiency and reducing risk remains a key topic of discussion for regulators in the US, EU and UK markets and improving it remains a top priority.
