The European Securities and Markets Authority (ESMA) has launched three new consultations on different aspects of the Central Securities Depositories Regulation (CSDR) Refit.
Perhaps most notably, one of the three separate consultation papers focuses on the scope of settlement discipline, looking at the underlying cause of settlement fails that are considered as not attributable to the participants in the transaction, and the circumstances in which operations are not considered as trading.
ESMA noted that “in order to ensure a smooth and orderly functioning of the financial markets concerned, the settlement discipline regime should not automatically penalise every individual settlement fail regardless of the context, or the parties involved.”
The consultation paper therefore specifically looks at the underlying causes of settlement fails that are considered as not attributable to the participants in the transactions.
The other two papers relate to the information to be provided by European CSDs to their national competent authorities (NCAs) for the review and evaluation and the information to be notified to ESMA by third-country CSDs.
ESMA has invited EU CSDs, third-country CSDs, CSD participants, as well as any stakeholders that may be impacted by the CSDR settlement discipline to respond to these three consultation papers by 9 September 2024.
Following the consultation, the responses will be assessed to finalise the respective proposals, before submission to the European Commission in Q1 2025. Other consultations regarding other aspects of CSDR will follow in the coming months.
In December, ESMA published a consultation paper on the CSDR penalty regime seeking input on amendments which may include cash penalties that increase with the length of the settlement fail.
Three months later, industry associations told European regulators that there is no basis for increasing penalties for settlement fails beyond their current form and have warned of the unintended consequences of doing so.
Among those to respond were the International Capital Market Association (ICMA), International Securities Lending Association (ISLA) and the Association of Global Custodians (AGC).
ISLA wrote that “there has not been sufficient time since the implementation of the regime in 2022 to be able to accurately determine its effectiveness on reducing settlement fails”.
ICMA pushed hard on the fact that there is no “logical or economic basis” for progressive penalties pointing to an “absence of any data or cost-benefit analysis” to support the proposal.
“Progressive penalties would introduce an unnecessary level of complexity, with the associated cost and resource drain, not only for implementing CSDs, CCPs, and custodians, but also market participants who need to reconcile penalty credits and debits, as well as pass these on to clients. Furthermore, this would put additional stress on an already dysfunctional claims process that has been born out of the EU’s CSDR penalty mechanism,” the association said.